Raven Industries Inc. Annual Report 2009

Plain-text annual report

INVEST IN WHAT YOU KNOW RAVEN Raven Industries P.O. Box 5107 Sioux Falls, SD 57117-5107 www.ravenind.com RAVEN 2009 ANNUAL REPORT for the fiscal year ended January 31 58585_Cover_u3.indd 1 4/3/09 2:54:57 AM Protect the Core Raven’s conservative approach to its operations has generated solid ﬁnancial results for more than 50 years. Year-over-year proﬁtable growth has always been our goal. In today’s environment, that is no longer the imperative. We have entered the most challenging economy in the company’s history and are taking the right actions for long-term viability: (cid:115)(cid:0) (cid:50)(cid:73)(cid:71)(cid:72)(cid:84)(cid:13)(cid:83)(cid:73)(cid:90)(cid:73)(cid:78)(cid:71)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:66)(cid:85)(cid:83)(cid:73)(cid:78)(cid:69)(cid:83)(cid:83)(cid:69)(cid:83)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:80)(cid:82)(cid:85)(cid:78)(cid:73)(cid:78)(cid:71)(cid:0)(cid:65)(cid:76)(cid:76)(cid:0)(cid:78)(cid:79)(cid:78)(cid:13)(cid:69)(cid:83)(cid:83)(cid:69)(cid:78)(cid:84)(cid:73)(cid:65)(cid:76)(cid:83)(cid:0)(cid:84)(cid:79)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:67)(cid:79)(cid:82)(cid:69) (cid:115)(cid:0) (cid:48)(cid:82)(cid:69)(cid:83)(cid:69)(cid:82)(cid:86)(cid:73)(cid:78)(cid:71)(cid:0)(cid:80)(cid:82)(cid:79)(cid:108)(cid:84)(cid:65)(cid:66)(cid:73)(cid:76)(cid:73)(cid:84)(cid:89)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:108)(cid:78)(cid:65)(cid:78)(cid:67)(cid:73)(cid:65)(cid:76)(cid:0)(cid:83)(cid:84)(cid:82)(cid:69)(cid:78)(cid:71)(cid:84)(cid:72) (cid:115)(cid:0) (cid:36)(cid:69)(cid:80)(cid:76)(cid:79)(cid:89)(cid:73)(cid:78)(cid:71)(cid:0)(cid:67)(cid:65)(cid:80)(cid:73)(cid:84)(cid:65)(cid:76)(cid:0)(cid:73)(cid:78)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:67)(cid:79)(cid:82)(cid:69)(cid:0)(cid:66)(cid:85)(cid:83)(cid:73)(cid:78)(cid:69)(cid:83)(cid:83)(cid:69)(cid:83)(cid:12)(cid:0)(cid:66)(cid:85)(cid:84)(cid:0)(cid:65)(cid:84)(cid:0)(cid:65)(cid:0)(cid:82)(cid:69)(cid:68)(cid:85)(cid:67)(cid:69)(cid:68)(cid:0)(cid:82)(cid:65)(cid:84)(cid:69) (cid:115)(cid:0) (cid:39)(cid:69)(cid:78)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:78)(cid:71)(cid:0)(cid:83)(cid:84)(cid:82)(cid:79)(cid:78)(cid:71)(cid:0)(cid:67)(cid:65)(cid:83)(cid:72)(cid:0)(cid:109)(cid:79)(cid:87)(cid:0)(cid:84)(cid:79)(cid:0)(cid:77)(cid:73)(cid:78)(cid:73)(cid:77)(cid:73)(cid:90)(cid:69)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:78)(cid:69)(cid:69)(cid:68)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:68)(cid:69)(cid:66)(cid:84) We will take advantage of the opportunities presented to us and create growth where we can. In the past year, this enabled us to achieve our ninth-consecutive year of record earnings per share and our 22nd-consecutive increase in the annual dividend—plus a special dividend. Inside this Report Letter to Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Business Proﬁle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Operations Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Eleven-Year Financial Summary. . . . . . . . . . . . . . . . . . . . . . . . .16 Business Segment Performance . . . . . . . . . . . . . . . . . . . . . . . .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 and Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Investor Information . . . . . . . . . . . . . . . . . . . . .Inside Back Cover FINANCIAL HIGHLIGHTS Dollars in thousands, except per-share data OPERATIONS For the years ended January 31 2009 2008 Change Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,913 $233,957 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,394 30,770 41,145 27,802 PER SHARE Net income—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 1 .53 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PERFORMANCE Operating income margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on beginning shareholders’ equity . . . . . . . . . . . . . . . . . . 0.52(a) 6.30 16.6% 11.0% 21.1% 26.0% 0 .44 6 .52 17 .6% 11 .9% 20 .8% 28 .3% Shares and stock units outstanding, year end (in thousands) . . . . 18,027 18,130 19 .6% 12 .8% 10 .7% 11 .1% 18 .2% –3 .4% –5 .7% –7 .6% 1 .4% –8 .1% –0 .6% (a) Excludes a special dividend of $1.25 per share that was paid during the fourth quarter of fiscal 2009. NET SALES (dollars in millions) EARNINGS PER SHARE (diluted, in dollars) SALES PER EMPLOYEE (dollars in thousands) $279.9 $234.0 $217.5 $204.5 $1.70 $1.53 $1.39 $1.32 $262 $252 $242 $246 $201 $181 $168.1 $142.7 $0.97 $0.75 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 Revenues rose 20% to a new high. This reflected much stronger sales at Applied Technology and Aerostar, and a slight increase for Engineered Films. The 11% increase in net income lifted earnings per share to its ninth-consecutive record year. Sales per employee rose nearly 4% for the latest period, making this its 11th-consecutive record year. RAVEN 2009 ANNUAL REPORT 1 58585_Narrative.indd 1 3/27/09 6:16:06 PM TO OUR SHAREHOLDERS, EMPLOYEES AND CUSTOMERS Raven posted its ninth-consecutive record year—as great success in our agricultural markets more than offset difficult conditions in other key markets. It was a year with two distinct parts. In the first three quarters, net income was up 20% over the previous year, driven primarily by the stunning growth in our Applied Technology Division (previously known as the Flow Controls Division). Then there was the fourth quarter, when net income dropped 22% (after 31-consecutive quarters of year-over-year record earnings) as demand for engineered films was down 28%. Good Results—Mixed Performance We had good results this past year, but didn’t accomplish them in the way we planned. The Applied Technology Division had a great year and Aerostar did well. But our Engineered Films Division and Electronic Systems Division both had major earnings shortfalls. • Sales increased 20% to a record $280 million. • Net income grew 11% to a record $30.8 million, and earnings per share were up from $1.53 the previous year to $1.70. • A total of $37.1 million was returned to shareholders through stock repurchases and dividends. • The quarterly dividend rose 18%: our 22nd-consecutive annual increase. A special one-time dividend of $1.25 per share was paid on November 14, 2008. • The year ended with no debt and $16.3 million in cash. Adapting to a Changing World The worldwide economy is in the worst shape I have experienced in my 40 years in business. Consumers and businesses are deleveraging after 20 years of excess spending and consumption. We over-built, we over-bought, and we over-borrowed. What we have done is pull trillions of dollars of future consumption into the present. Now the federal government is trying to stimulate the economy by leveraging up and putting us into even more debt. In this environment, you cannot rely on the same old playbook. Traditional long-range strategic planning becomes meaningless. Anyone doing a three- or five-year strategic plan is wasting valuable corporate resources. At Raven, our plan is based on the belief that no meaningful turn- around will take place until at least mid-2010, and that it will be a long and slow recovery. Corporate and consumer balance sheets must be repaired and excess capacity must be excised before sustain- able growth can occur. Not all of our businesses are positioned for growth in this difficult environment, but together they provide Raven with the strength to us a big advan- remain financially strong and profitable. That gives Ronald M. Moquist President & Chief Executive Officer 2 RAVEN 2009 ANNUAL REPORT 58585_Narrative.indd 2 3/30/09 6:48:58 AM tage when one of our businesses with solid fundamentals is going through a down-cycle in a weak market. It also gives us staying power against single-product competitors. Engineered Films Continues to Struggle The Engineered Films Division (EFD) produces high- performance plastic sheeting for construction, oil field, industrial, agricultural and geomembrane applications. It was another difficult year for EFD, with sales up 5% but operating income down 38%. High raw material costs and competitive pricing again combined to drive down proﬁtability. Oil field applications and construction projects each contribute 40% of sales volume, and both of these markets are in the tank. Oil drilling in North America drops dramatically when oil prices go below $60 a barrel. As this letter is being written, prices are under that level. While residential construction was down all of last year, commer- cial construction held up for the first nine months. Now both are suffering, with no relief in sight. We don’t foresee a pickup in either market, so sales and income in EFD will drop signiﬁcantly in the coming year. Our game plan for this business is to emphasize product differentiation, raw material cost controls and improved efﬁciencies. We have the capability to produce high-perfor- mance, multi-layer ﬁlms using our modern, state-of-the-art plastic extruders. We will focus on creating high qual- ity ﬁlms at prices comparable to our competitor’s lower performing commodity ﬁlms, giving customers better value at the same price. 30.1% 36.7% RETURN ON EQUITY AND RETURN ON ASSETS (percent) We are the most ﬁnancially sound company in the indus- trial ﬁlms marketplace, which should allow us to negotiate better prices and terms on raw mate- rials. These commodities account for 60-70% of our ﬁlms’ price, so this is a key consideration in driving profit margins. Our extrusion equip- m e n t i s n e w, h i g h l y efﬁcient and productive, and can hold ﬁlm thick- nesses to tight tolerances, which conserves mate- rial and again gives us a competitive advantage. 20.8% 21.1% 26.0% 24.9% 23.8% 26.9% 28.3% 18.2% 21.3% 22.5% 2004 2005 2006 2007 2008 2009 Return on Equity Return on Assets We are committed to investing in the right assets that provide a good return on our shareholders’ investment. Applied Technology Builds on Success The Applied Technology Division (ATD) had an amazing performance last year. Sales were up 60% and operating income grew 77%. ATD provides precision solutions for agriculture—such as GPS steering devices, planting and spraying controls and data collection—to reduce operating costs and improve yields. Agriculture has been one of the few bright spots in the economy. Farm income was at an all-time high last year as commodity prices peaked. Prices are down from their mid-year highs, and input costs such as seed, chemicals and fertilizer are up—putting a squeeze on net income. Farm income will drop in 2009, but overall, growers are in good shape and the debt they are carrying is manageable. ATD will drive growth in two ways. First, we will increase the distribution of our products and continue to expand internationally. Second, we will create new products that make farming more productive. Our range of products gives us advantages over competitors, since we can offer total solutions and not just single-purpose devices. Our strategy is to supplement our complete offering of products with a suite of advisory and information services, such as these being launched or currently in development: • Collecting and distributing critical input data • Providing recommendations and prescriptions for field operations • Supplying advanced hardware and software to execute those recommendations • Helping growers build a database that over time can take variability out of operations Demand for grain to feed people and cattle, and to produce fuel, should continue at a high level. The drive to improve crop yields and productivity world-wide is ongoing. We just ﬁnished a great year. Beating that performance will be a challenge. Electronic Systems Had a Tough Year Sales in our Electronic Systems Division (ESD) were down 9%, and operating income dropped 43%. ESD is an elec- tronics contract manufacturer specializing in low-volume, high-mix production requiring a high degree of engineer- ing support and customer service. We build printed circuit boards and assemblies for a small base of Fortune 500 companies. Sales focus on three markets: • Electronic bed controls • Printed circuit boards for avionics • Secure communication devices for government agencies Sales for bed controls were down 52% and gross profits dropped by almost 75%. That comes after a large drop the RAVEN 2009 ANNUAL REPORT 3 58585_Narrative.indd 3 3/27/09 6:16:16 PM previous year, as this product is directly linked to residen- tial construction and home remodeling. Bed control sales will drop even further in the coming year as the housing market continues to suffer. The other two markets are good ones: avionics and secure communications. Avionics is our largest business, making up more than 50% of sales in ESD. Sales of printed circuit boards for avionics were up 33% for the year. This business has the potential to grow, unless Boeing and Airbus aircraft production schedules are pushed out or cancelled in the coming year. Sales of communication devices were down 36% as we lost a large customer last year. That situation has now stabi- lized. Although it is relatively small at $16 million in annual sales, our communications business should hold up well in a recession because of increased government spending. ESD is becoming more competitive when total delivered cost is considered. Quality and supply chain disruption issues associated with Asian competitors are becoming especially acute. Customers are looking for best price, but they are also aware that a break in the supply chain can have disastrous consequences. The ﬁnancial stability and reliability of suppliers will become increasingly important. That should beneﬁt ESD. Aerostar Continues to Improve Our Aerostar subsidiary had a 57% sales increase, and operating income more than doubled. Aerostar’s results were right on target, and continuing improvements are expected in the year ahead. We are an important supplier of parachutes, specialty protective outerwear and aerostats for military, commercial and scientiﬁc markets. Aerostar is in a strong position to weather the recession. We have contracts for parachutes and specialty outerwear, and our aero- stat orders are mainly a military, scientific or NASA purchase. REGULAR DIVIDENDS PER SHARE excluding special dividends (dollars) $0.52 $0.44 Our growth plan is to develop and promote tethered aerostats, as they have wide-ranging applications for commu- nications, surveillance and intelligence work. We go into the year in good shape, as most of our projected sales are already booked. $0.36 $0.28 $0.22 $0.17 2004 2005 2006 2007 2008 2009 Our policy is to return earnings to shareholders in the form of a dividend. As a result, our regular dividend has seen a 25% five-year compound annual growth rate. 4 RAVEN 2009 ANNUAL REPORT Invest in What You Know When I joined Raven in 1975, our board of directors was heavily invested financially and emotionally in the company’s success. One of our founding board members counseled management to invest in Raven, because that was the one business we really understood—and if it were a good business, we should own a part of it. That was good advice, so I made my ﬁrst purchase of Raven stock two months later. For 53 years, Raven has been a conservatively run, profit- able operation. That will not change. Our philosophy has always been to deploy capital in our core businesses where we can get high returns. At Raven, we invest in what we know: where we understand the risks and rewards. New Priorities Raven has the resources to come out of this recession a strong survivor, but we have to re-calibrate our thinking and implement a new strategy. For the near term, growing the business at previous target rates is no longer the imperative. This is our new strategy: • Protect the core • Generate and preserve cash • Invest in quality Protect the Core This is not just about survival: it’s about protecting core assets and core values. We will outperform the competition during the worst of the recession and thrive when we come out by taking these actions: • Get rid of everything that is non-core. This includes customers, product lines, assets and jobs. • Defend core assets. Protect businesses that have performed well in the past but will struggle in this recessionary environment. • Protect core values and beliefs. Generate and Preserve Cash While the conservative approach to our business won’t change, we will use these strategies to defend the balance sheet, reduce our risk proﬁle and improve working capital turnover: • Turn non-core assets to cash • Improve inventory and accounts receivable turns • Extend accounts payable terms • Reduce capital investments • Cut expenses to the bone • Suspend stock buy-backs At the same time, we will continue to pay the dividend, because returning cash to shareholders is one of our “core” values. 58585_Narrative.indd 4 3/27/09 6:16:16 PM Invest in Quality We will emphasize quality in everything we do: • Customers—They must be financially sound and prospective long-term partners. • Suppliers—They must A break in the supply chain can be more devastating than losing a customer. be reliable. • Products—We must eliminate waste, scrap and re-work. • R&D—Not all good product development projects will make the cut. They must have high projected returns and relatively low risk. Meeting the Challenges Ahead This coming year will be the most challenging in our history. Under these difﬁcult conditions, we do not expect to top last year’s record earnings of $1.70 per share. What we can do, and have always done, is to optimize performance regardless of how the markets play out, and be ready to take advantage of opportunities. From left to right: Daniel Rykhus, Executive Vice President; Ronald Moquist, President & Chief Executive Ofﬁcer; Barbara Ohme, Vice President–Administration; Thomas Iacarella, Vice President & Chief Financial Ofﬁcer On April 1, 2009, Conrad Hoigaard will be stepping down as Raven’s chairman of the board, a position he has held since April 1980. I am deeply grateful for his 29 years of leadership and exemplary service as chairman. He will remain a director. Finally, my thanks to all Raven employees. Their talent and dedication once again earned us the honor of being named by Forbes Magazine as “One of the Best Small Companies in America.” This is our third-consecutive year on the list, and our highest ranking: coming in at 45, after previous years at 85 and 68. It is a privilege to lead such a great company. Ronald M. Moquist Ronald M. Moquist President & CEO March 24, 2009 RAVEN 2009 ANNUAL REPORT 5 58585_Narrative.indd 5 3/27/09 6:16:20 PM Business Profile Raven is a diversified company that strives for an intergrated approach to drive success: • Significant share in a niche market, with additional opportunities for profitable expansion • A business model that avoids labor-intensive commodity products—and offshore competition • Strong cash generation that funds reinvestment and shareholder returns • A high level of customer service, including consultative sales, materials management, strong quality control and after-sales support Operating Unit Products or Services Markets/Product Uses Applied Technology (formerly Flow Controls) Engineered Films Electronic Systems Aerostar International • • • Domestic and international agricultural OEMs and sprayer manufacturers Agricultural equipment aftermarket Marine ship pilots • • • • • • Ag equipment guidance systems: Cruizer™ Spray equipment rate controllers: SCS Series™ Precision agricultural product application, steering and data management systems: Viper™, Envizio Pro™ Ag equipment boom management and applications systems: SmartBoom™, AccuBoom™, AutoBoom™ Tractor steering systems: SmarTrax™, QuickTrax™, FarmPRO™ Navigational guidance for professional ship pilots: Wheelhouse II™ • • • • String reinforced plastic (polyethylene) sheeting: DURA-SKRIM® Extruded polyethylene film that can be formulated and tailored to a customer’s specifications: RUFCO® Silage bunker covers that protect grain and animal feed: FeedFresh™ Vapor & gas retarders/barriers to prevent moisture and radon from migrating through concrete slabs or walls: VaporBlock® • • • • • Energy and geomembrane: oilfield pit liners, floating covers, remediation liners and covers, landfill caps and interim covers, pond and canal linings Construction: temporary building enclosures, house wraps, disaster films, vapor retarders, gas barriers Manufactured housing: transit enclosures, house wraps Industrial: multilayer packaging films, lamination films, containment tubing Agriculture: temporary grain covers, silage bunker covers, poultry house ceilings, waste disposal liners • • • Contract manufacturing of low volume/high mix industrial products that stand up to harsh environments with great reliability Repair/warranty service management and product distribution High levels of engineering support and customer service • High-altitude research balloons carrying scientific payloads High-altitude airships that reach near-space (60,000- 80,000 feet) for communications, data relay, surveillance Tethered aerostats (blimps) for military, homeland security, scientific use Military parachutes Clothing to protect from exposure to biochemicals, fuels and fumes, extreme cold water immersion Customized inflatable military decoys • • • • • • • Fortune 500 and industrial OEMs in North America End markets served by customers include controls and instrumentation, aerospace/aviation, communication, defense • • • • • U.S. and foreign governments U.S. and international military forces Homeland security NASA Scientific agencies and universities 6 RAVEN 2009 ANNUAL REPORT Sales by Operating Unit Income by Operating Unit Applied Technology Engineered Films Electronic Systems Aerostar Competitive Strengths Milestones • • • • • Market leader for agricultural sprayer controls Large installed base of sprayer controls Solid brand recognition and distribution network Wide range of precision agricultural products that control input costs Excellent after-sale support through a strong, centralized service system • • • • Increased revenues 60% and operating income 77% Strong demand for Cruizer, Envizio Pro Continued overseas expansion led international sales to 17% of total revenues Successfully scaled manufacturing and service operations to handle higher sales • • • • • Vertically integrated manufacturer: offering extruded blown film, lamination and conversion Broad product line including mono- to seven-layer co-extruded film and reinforced laminated sheeting, from .001 to .045 inches thick Superior target marketing R&D team develops customized solutions for customers ISO 9001:2000 certification • • • Introduced the industry’s first reinforced silage covers to prevent oxygen intrusion; radon barrier films; house wrap films Added horizontal cast line extrusion capabilities to geomembrane production Maintained market share in difficult environment • • • • • Advanced manufacturing technology Full-service provider: from design through engineering, manufacturing and customer service Close partnership with customers IPC certification to produce lead-free electronics assemblies ISO 9001:2000 certification • • • • Consolidated two facilities into one while improving efficiencies Kaizen events led to improvements in all processes, from order through delivery Replaced most of sales lost from slowing markets and a customer that was acquired Continued to generate solid cash flow • • • Sole source in U .S . for scientific research balloons Over 50 years of experience in manufacturing stratospheric balloons Best technology for high-speed sewing and sealing of specialty fabric and films • • • • Reported record sales and operating profits Won U.S. Army contract to provide series of small tethered aerostats as decoys in Iraq Doubled production of parachutes and protective wear for military personnel Revitalized sales of high-altitude scientific research balloons to NASA APPLIED TECHNOLOGY SALES (dollars in millions) $103.1 $64.3 $40.7 $35.1 $47.5 $45.5 2004 2005 2006 2007 2008 2009 ENGINEERED FILMS SALES (dollars in millions) $91.1 $89.9 $85.3 $82.8 $58.7 $42.6 2004 2005 2006 2007 2008 2009 ELECTRONIC SYSTEMS SALES (dollars in millions) $66.3 $68.0 $62.0 $56.2 $44.3 $47.0 2004 2005 2006 2007 2008 2009 AEROSTAR SALES (dollars in millions) $20.7 $21.7 $27.2 $18.0 $17.3 $14.7 58585_Narrative.indd 7 3/27/09 6:16:26 PM 2004 2005 2006 2007 2008 2009 RAVEN 2009 ANNUAL REPORT 7 RAVEN “Investing in what we know means committing resources to the strategy that has been in place for five years. We leveraged earlier investments: in Starlink, which helped us develop a stronger steering product; in Montgomery Industries, which gave us AutoBoom and a presence in Canada; and in new applications for field computers. We invested in capacity and efficiency to keep pace with growing demand. These actions—and the new products that resulted—gave us a strong, broad precision ag offering that saves money for growers while providing the information they need.” Matthew T. Burkhart General Manager— Applied Technology Division APPLIED T ECHNOLOGY DIVISION 8 RAVEN 2009 ANNUAL REPORT 58585_Narrative.indd 8 3/27/09 6:16:29 PM The Envizio Pro™ offers a complete package (equipment guidance, chemical control, and implement control) that is easy to incorporate into the cab of a sprayer—and for growers to use. A Phenomenal Year Ready for the Challenge In the summer of 2008, agricultural market conditions in the U.S. and other geographies we serve were particularly strong. High prices for corn and rising costs for fuel, fertil- izer and seed created ideal market conditions. Growers had more discretionary funds, and many wanted to invest these in precision agriculture products to reduce their input costs and help them better manage farming-related information. This helped us grow faster than the overall industry for a second year—and to achieve the goals we had set. We continued to expand internationally. Overseas markets contributed 17% of revenues, up from 16% last year and closer to our 25% goal. We ended the year with 19 people in our international sales and service staff, a significant investment for a company our size. Progress was made in Canada, where we are develop- ing relationships with OEMs and expanding our dealer network. We added a new major distributor in Australia to help us more effectively reach growers there. In Western Europe, we capitalized on opportunities in the U.K., France and Germany, and saw strong double-digit growth from our relatively small distributor base. We are proceeding cautiously in South America and Eastern Europe, because local markets are less stable. We refined our product line. Our engineering staff improved the design of our products, so they are easier to install, simpler to operate, and more reliable. This process will bring long-term benefits for existing and future offerings. We also focused on enhancing existing products. One exam- ple was adding VRA (variable rate application) technology to our popular Envizio Pro™ field computer. Growers now can control input costs by using lower amounts of fertilizer and pesticides in areas where these are less desirable, while maintaining levels where these can maximize yields. In addition to our strong financial performance, we accelerated implementation of our strategy to increase visibility in the global precision agricultural marketplace. We will not match the unsustainably high levels of growth seen last year, and continued increases in revenue will be difficult to achieve. Current indications are that corn, wheat and soybean prices will remain near the levels seen at the end of 2008, and higher input costs will constrain farm income. This means the progress we make on the following goals will be critical to our continued success. First, we plan to establish a more comprehensive U.S. grower distribution channel. This will happen as we develop additional dealer-direct links, which would mean at least 70 new dealer locations offering our products. Our second goal is to improve international operations by continuing to build a stronger support system at our head- quarters. We will invest in system engineers and product support engineering that allows us to “localize” products for different markets, and accelerates our pursuit of new joint development projects in overseas markets. Thirdly, we expect to develop alliances with other precision agricultural providers to expand our market reach. These relationships will take us to the next level in three areas: 1) creating distribution channel opportunities to reach more growers, 2) filling technology gaps in or giving us access to emerging technologies, and 3) collaborating on product development. O n F e b r u a r y 1 , 2 0 0 9 , M a t t B u r k h a r t b e c a m e general manager of Applied Technology. Dan Rykhus assumed additional corporate responsibilities, with the general managers of Applied Technology and Electronic Systems reporting to him, along with the information technology function. We also changed the division’s name from “Flow Controls” to “Applied Technology.” This reflects the broader approach we are taking to our market. n RAVEN 2009 ANNUAL REPORT 9 58585_Narrative_u2.indd 9 3/30/09 2:11:28 PM RAVEN “Investing in what we know means focusing on innovation. The progression of our business frequently involves providing a commodity film product to a customer, establishing trust, and then working closely with the customer to design films that offer greater benefits—from weight to strength to cost savings. That final step is where we really add value and introduce films that can bring long-term growth.” James D. Groninger Division Vice President and General Manager— Engineered Films Division E NGINEERED F ILMS DIVISION 10 RAVEN 2009 ANNUAL REPORT 58585_Narrative.indd 10 3/27/09 6:16:35 PM VaporBlock® ﬁlms prevent moisture from seeping from the ground to damage expensive coatings and ﬂoor coverings, or the structural integrity of buildings under construction. Innovation in a Difficult Year For the ﬁrst nine months, Engineered Films sales were rela- tively strong. This was due in part to serving diverse end markets, where strength in one area could offset slowness in another. In the ﬁnal quarter, the recession hit the markets where we had been performing well: particularly oil and gas exploration. As a result, while we were unable to close out the year as we would have liked, Engineered Films still had some notable accomplishments. We used new manufacturing processes to become more innovative. This truly distinguishes us from our competition. We have invested in new extrusion and conversion technology, providing us with the flexibility to go beyond just offering commodity ﬁlms to customers. This includes giving them the opportunity to work with our engineers to design products to their speciﬁcations, and conducting trial runs of those ﬁlms on our state-of-the-art manufacturing lines, so customers can see the processes and costs involved. We introduced new products. Notable among these was our VaporBlock® Plus™ multilayer barrier ﬁlm. When placed under concrete slabs in commercial and residen- tial construction, this material restricts the migration of naturally occurring gasses (such as methane and radon) 50- to 200-times more effectively than other premium poly- ethylene ﬁlms. Another important addition was FeedFresh™ silage covers. Because of its oxygen barrier, FeedFresh reduces the amount of spoilage in cattle feed. This saves money for farmers while increasing the amount of milk that dairy cows can produce, or improving daily weight gains for steers and heifers. We have a number of other products in trials, and some are being evaluated as private label opportunities for our customers. Potential applications for our higher perfor- mance products span a diverse set of markets, including environmental, agricultural and industrial. Keeping Costs in Line with Opportunities The ﬁlm industry is looking for its end-use markets to ﬁnd a ﬂoor in this soft economy. Once this happens, we believe there will be opportunities for growth. In the meantime, we will build on the disciplines put in place during this past year. We will keep our capital expenditures low, ﬁne-tuning prior investments so we can continue to meet customers’ needs. We will expand on our fourth- quarter workforce reductions by carefully controlling selling and other indirect expenses. We believe opportunities in the coming year will arise from two sources. First, customers will want to reduce their costs while still getting the performance they need from ﬁlms. They will be attracted to our unique ability to formulate value-added products to their speciﬁcations—and within their budgets. Second, we have the capacity to serve new markets. By extending the lives of our products and developing new formulations to provide a better value to potential users of our ﬁlms, we can reach additional customers. While it will take some time to return to the levels of proﬁt- ability seen in past years, we remain committed to this goal. Watching our costs, working closely with customers, and having an innovative product line that will reach beyond current markets should help us achieve this. n 58585_Narrative.indd 11 3/27/09 6:16:36 PM RAVEN 2009 ANNUAL REPORT 11 RAVEN “During this past year, we were investing in what we know by enhancing operational excellence. We completed a facility consolidation that improved customer service and reduced costs. Kaizen events were used to identify ways to strengthen our processes. These efforts allowed us to continue generating cash to fuel Raven’s growth. The results also put us in a good position to increase the Electronic Systems Division’s operating profit in the coming year— despite an uncertain economy.” David R. Bair Division Vice President and General Manager— Electronic Systems Division E LECTRONIC S YSTEMS DIVISION 12 RAVEN 2009 ANNUAL REPORT What differentiates Electronic Systems from its competitors is the ability to produce short runs of a component—maybe only a handful a year—with high quality and reliability. Improved Operations More Progress Expected on Goals We set three goals for the past fiscal year: 1) to improve inventory turns, 2) to strive for a higher on-time deliv- ery rate, and 3) to add a new customer. The combination of two very weak customer end-user markets, and the loss of a customer through acquisition, meant we did not make as much progress toward these goals as we would have liked. But important advances were made. We focused on markets with growth potential. Industrial controls—from bed controls to security monitor- ing equipment—were hit by issues in residential housing and commercial real estate. That led to a signiﬁcant drop in sales to this area. However, we were able to increase revenues from aerospace/aviation. This reﬂected continued demand for fuel efﬁcient planes for the airlines, and having our products incorporated into a number of different defense aircraft and missile programs. Products also were shipped to our sister division, Applied Technology, for the ﬁrst full ﬁscal year. We increased our operating efficiency. A key action was the September consolidation of two Sioux Falls manu- facturing facilities into one, which eliminated the issues and expenses of moving products between the two of them. In addition, on-time delivery improved slightly, and we increased our operating efﬁciency during the second half of the year. Despite having a lower margin product mix this year, these actions contributed to a stronger oper- ating margin in the second half compared with the ﬁrst six months. We conducted four Kaizen (process improvement) events in the third and fourth quarters. The ﬁrst covered nearly every aspect of our processes, from receiving an order until the product is delivered. We identiﬁed more than 20 opportunities to cut waste and improve our approach. Then we concentrated on the engineering change order process, new product introductions, and schedule changes, and came up with 100 more areas to strengthen. These will become our focus in the new ﬁscal year. We do not anticipate any improvement in the industrial controls market during the year, and we hope it is near the bottom. Most of our growth will come from aerospace/ aviation. While these are lower margin products for us, this year will see us producing more existing products rather than new ones, which should help proﬁtability. As we hold more Kaizen events and streamline our processes, our margins should improve. With this in mind, we are working toward four goals for ﬁscal 2010. First, we plan to increase on-time delivery to above 90% by focusing on what causes late releases—from material availability, to maintaining schedule integrity, to strengthening communication between our customers and ourselves. Second, we expect to raise our productivity by more than 5% through holding at least one Kaizen event each month. Third, we will continue to improve our inventory turns, which increased slightly in ﬁscal 2009. Tactics for achieving this include more discipline regarding customer schedule changes and better communication with vendors. Fourth, we are working hard to add a major customer. The process of integrating a new customer can take 12 to 18 months, so we would expect to begin seeing the beneﬁts of this in ﬁscal 2011. These goals reﬂect how we are investing our resources in Electronic Systems Division’s long-term future. We plan to achieve them—despite poor conditions in some end-use markets—while cutting capital spending by about 50% from fiscal 2009 levels. This should help us continue to generate good amounts of cash for the year. n 58585_Narrative.indd 13 3/27/09 6:16:42 PM RAVEN 2009 ANNUAL REPORT 13 RAVEN “Here’s how we invested in what we know. One, we doubled our production of military parachutes and protective wear—while automated systems meant we only increased related staff by 20%. Two, we created closer relationships with customers—and other companies that serve them—to cultivate long-term growth. Both actions reflected our philosophy of leveraging Aerostar’s foundation business in aerostats and sewn products.” Mark L. West President— Aerostar International, Inc. AEROSTAR INTERNATIONAL 14 RAVEN 2009 ANNUAL REPORT 58585_Narrative.indd 14 3/27/09 6:16:47 PM This super-pressure balloon, produced by Aerostar and launched by NASA from Antarctica in December 2008, set a new record for the longest balloon flight: more than 50 days. Delivering on Goals for the Year Most of Aerostar’s revenues come from government contracts, which are not as directly affected by the changes in the economy. This helped us meet nearly every goal we set for the year. We exceeded our revenue goal in parachutes and protective wear, as shipments of both products ramped up throughout the year. Because these contracts are in their second year—past the period for prototypes and approvals—their proﬁtability reached our targeted levels, too. This reflects our efficient approach to high-speed manufacturing. We took a new approach to building the large tethered aerostat business. The original goal was to follow our successful October 2007 flight by booking orders for the product. This did not happen. The military appreci- ates the role aerostats can play in solving problems—such as better communication with troops in the ﬁeld—but it does not usually buy aerostats directly. As a result, the best way to generate business is by partner- ing with large defense electronics contractors that need our aerostats to carry their communication payloads. We spent the year meeting and forming relationships with these ﬁrms. Interest has been good, and we are quoting programs that we believe will generate sales in future years. We met our revenue goal for this business by selling small tethered aerostats. We began shipments under a $1.8 million government contract for aerostats to be used as decoys in Iraq. We also made our ﬁrst delivery in Spain as part of opening the European market for this product. The high-altitude research balloon business saw its highest sales in a decade. This interest is being driven by scientists who want longer duration flights to gather more information. We have worked with NASA for years to develop a new type: the super-pressure balloon. A successful ﬂight of this product occurred in Antarctica in December, and we already are building one that is twice as large. More progress is needed for high-altitude airships. While our June 2008 ﬂight was not the unqualiﬁed success we had hoped for, the U.S. military saw the potential for this airship and is proceeding with the program. We learned a number of lessons from that launch, including new tech- niques to deal with air turbulence, and are applying them to our next ﬂight scheduled for this fall. Creating Opportunities While the new presidential administration will subject mili- tary spending to greater scrutiny, the products we provide have two advantages. First, they are connected with the safety of our troops, such as parachutes. Second, they are small programs so may be less likely to face cuts. We enter the year with most of our expected revenues in place. Our biggest challenge will be creating opportunities to generate the rest. The stage has been set for parachutes. The MC-6 program, which involved 20,000 parachutes, will conclude at the end of this year. We have qualified for the follow-on contract: the 52,000-parachute T-11 program. Because many of its components are the same as the MC-6’s, we believe Aerostar has an edge in gaining this business. For tethered aerostats, we will continue cultivating relation- ships with defense contractors that should lead to future orders. Our current-year goal for high-altitude balloons and airships is to ensure their key flights go smoothly. Should this happen, we believe demand for these products could accelerate quickly over the next few years, provid- ing a signiﬁcant driver for Aerostar’s revenue and proﬁt growth for years to come. n 58585_Narrative.indd 15 3/27/09 6:16:48 PM RAVEN 2009 ANNUAL REPORT 15 For the years ended January 31 2008 2007 ELEVEN-YEAR FINANCIAL SUMMARY 2009 Dollars in thousands except per-share data OPERATIONS FOR THE YEAR Net sales Ongoing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,913 Sold businesses(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 279,913 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,881 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income 46,394 Ongoing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sold businesses(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 46,394 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,901 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,770 Net income as % of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0% 26.0% Net income as % of beginning equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,884(b) FINANCIAL POSITION Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,073 23,322 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,751 Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.21 Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,880 144,415 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,556 Long-term debt / total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory turnover (CGS / year-end inventory) . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS PROVIDED BY (USED IN) Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,037 (7,000) Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,969) Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . (5,005) COMMON STOCK DATA Net income per share–basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.71 1.70 Net income per share–diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.77(b) Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.30 Stock price range during year High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47.82 Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.60 Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21.81 18,027 Shares and stock units outstanding, year-end (in thousands) . . . . . . . . . . . . . . . . 8,268 Number of shareholders, year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER DATA 12.83 Price / earnings ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,070 Sales per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 262 Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,361 0.0% 5.9 $233,957 — 233,957 59,148 41,145 — 41,145 42,224 $ 27,802 $217,529 — 217,529 54,882 38,302 — 38,302 38,835 $ 25,441 11 .9% 28 .3% 11 .7% 30 .1% $ 7,966 $ 6,507 $100,869 22,108 $ 78,761 4 .56 $ 35,743 147,861 — $118,275 $ 73,219 16,464 $ 56,755 4 .45 $ 36,264 119,764 — $ 98,268 0 .0% 4 .8 0 .0% 5 .8 $ 27,151 (4,433) (8,270) 14,489 $ 1 .54 1 .53 0 .44 6 .52 $ 45 .85 26 .20 $ 30 .02 18,130 8,700 19 .6 930 $ 252 $ 66,628 $ 26,313 (18,664) (10,277) (2,626) $ 1 .41 1 .39 0 .36 5 .45 $ 42 .70 25 .46 $ 28 .43 18,044 8,992 20 .5 884 $ 246 $ 44,237 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 and stock units outstanding. (a) In fiscal 2003, 2001, and 2000, the company sold its Beta Raven Industrial Controls, Plastic Tank, and Glasstite businesses, respectively. 16 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 16 3/27/09 6:29:31 PM 2006 2005 2004 2003 2002 2001 2000 1999 $204,528 — 204,528 53,231 37,284 — 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 $168,086 — 168,086 43,200 27,862 — 27,862 27,955 $ 17,891 $142,727 — 142,727 33,759 21,981 (355) 21,626 21,716 $ 13,836 $119,589 1,314 120,903 27,515 16,861 204 17,065 17,254 $ 11,185 $112,018 6,497 118,515 23,851 13,788 (613) 13,175 13,565 $ 8,847 10 .6% 26 .9% $ 15,298(c) 9 .7% 23 .8% 9 .3% 21 .5% 7 .5% 18 .4% $ 3,075 $ 2,563 $ 2,371 $ 61,592 20,950 $ 40,642 2 .94 $ 19,964 88,509 — $ 66,082 $ 55,710 11,895 $ 43,815 4 .68 $ 15,950 79,508 57 $ 66,471 $ 49,351 13,167 $ 36,184 3 .75 $ 16,455 72,816 151 $ 58,236 $ 45,308 13,810 $ 31,498 3 .28 $ 14,059 67,836 280 $ 52,032 $113,360 19,498 132,858 21,123 7,417(d) 3,331(e) 10,748 10,924 $ 6,411(d)(e) 4 .8% 11 .8% $ 2,399 $ 51,817 13,935 $ 37,882 3 .72 $ 11,647 65,656 2,013 $ 47,989 $107,862 42,523 150,385 24,217 7,971 2,606(f) 10,577 10,503 $ 6,762(f) 4 .5% 10 .9% $ 2,895 $ 55,371 14,702 $ 40,669 3 .77 $ 15,068 74,047 3,024 $ 54,519 $108,408 46,798 155,206 24,441 8,220 1,453 9,673 9,649 $ 6,182 4 .0% 10 .0% $ 2,944 $ 60,279 15,128 $ 45,151 3 .98 $ 19,563 83,657 4,572 $ 62,293 0 .0% 5 .4 0 .0% 5 .4 0 .1% 6 .5 0 .3% 4 .4 0 .5% 5 .0 4 .0% 5 .9 5 .3% 5 .2 6 .8% 4 .9 $ 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 .9 845 $ 242 $ 43,619 $ 18,871 (7,631) (19,063) (7,823) $ 0 .99 0 .97 0 .85(c) 3 .67 $ 26 .94 13 .08 $ 18 .38 17,999 6,269 18 .9 835 $ 201 $ 43,646 $ 19,732 (4,352) (6,155) 9,225 $ 12,735 (9,166) (5,830) (2,261) $ 18,496 (13,152) (8,539) (3,195) $ 9,441 9,752 (14,227) 4,966 $ 10,375 6,323 (16,326) 372 $ 0 .77 0 .75 0 .17 3 .68 $ 15 .23 7 .56 $ 14 .11 18,041 3,560 18 .8 787 $ 181 $ 47,120 $ 0 .61 0 .60 0 .14 3 .21 $ 9 .20 4 .38 $ 7 .91 18,133 2,781 13 .2 784 $ 154 $ 42,826 $ 0 .48 0 .47 0 .13 2 .82 $ 5 .88 3 .02 $ 5 .64 18,424 2,387 12 .1 858 $ 138 $ 33,834 $ 0 .31 0 .31 0 .12 2 .53 $ 3 .48 1 .88 $ 3 .04 18,956 2,460 9 .8 1,082 $ 123 $ 38,239 $ 0 .26 0 .26 0 .11 2 .32 $ 3 .04 2 .25 $ 2 .40 23,496 2,749 9 .2 1,369 $ 110 $ 44,935 $ 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 1,507 $ 103 $ 47,431 (b) Includes a special dividend of $1.25 per share that was paid in fiscal 2009. (c) Includes a special dividend of $.625 per share that was paid in fiscal 2005. (d) Includes $2.6 million of business repositioning charges, net of gains on plant sales, primarily in Electronic Systems and Aerostar. (e) Includes the $3.1 million pretax gain ($1.4 million net of tax) on the sale of the company’s Plastic Tank Division. (f) Includes the $1.2 million pretax gain ($764,000 net of tax) on the sale of assets of the company’s Glasstite subsidiary. RAVEN 2009 ANNUAL REPORT 17 58585_Financials.indd 17 3/27/09 6:29:31 PM BUSINESS SEGMENTS For the years ended January 31 2004 2005 2006 2007 2008 2009 4,492 17,382 1,201 880 8,916 20,191 1,612 871 19,907 33,512 7,359 2,436 17,739 43,688 4,012 4,046 10,850 25,175 1,357 1,086 15,739 25,181 3,960 1,403 10,365 25,865 1,077 1,237 23,440 41,988 13,266 2,887 13,586 30,047 938 1,085 10,111 27,629 577 1,142 19,102 36,938 1,008 1,125 10,516(b) 23,701 1,372 876 Dollars in thousands APPLIED TECHNOLOGY DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $103,098 $ 64,291 $ 45,515 $ 47,506 $ 40,726 $ 35,059 8,254 33,884 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,304 48,881 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 2,674 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . 1,004 1,383 ENGINEERED FILMS DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,858 $ 85,316 $ 91,082 $ 82,794 $ 58,657 $ 42,636 10,563 10,919 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,941 35,862 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712 3,120 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . 1,611 4,303 ELECTRONIC SYSTEMS DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,983 $ 67,987 $ 66,278 $ 56,219 $ 47,049 $ 44,307 5,797 5,926 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,975 26,847 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 841 1,399 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . 850 1,159 AEROSTAR Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,186 $ 17,290 $ 14,654 $ 18,009 $ 21,654 $ 20,725 4,219 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,744 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . 444 INTERSEGMENT ELIMINATIONS Sales Engineered Films Division . . . . . . . . . . . . . . . . . . . . $ (210) $ (533) $ — $ — $ — $ — — (1,977) Electronic Systems Division . . . . . . . . . . . . . . . . . . . — (25) Aerostar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (52) Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (152) REPORTABLE SEGMENTS TOTAL Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,913 $233,957 $217,529 $204,528 $168,086 $142,727 54,896 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,182 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,576 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . 7,289 CORPORATE & OTHER Operating (loss) from administrative expenses . . . . . . $ (8,502) $ (7,467) $ (6,806) $ (7,258) $ (6,494) $ (6,080) Assets(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,532 24,233 306 425 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . 244 469 Depreciation & amortization . . . . . . . . . . . . . . . . . . . . TOTAL COMPANY Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,913 $233,957 $217,529 $204,528 $168,086 $142,727 46,394 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,415 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,001 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . 7,758 Depreciation & amortization . . . . . . . . . . . . . . . . . . . . 34,356(b) 73,756 7,075 3,548 27,862(b) 88,509 7,541 3,841 38,302 119,764 16,522 5,885 37,284 106,157 10,358 5,151 41,145 147,861 6,635 7,344 45,108 102,953 16,012 5,490 48,612 116,332 6,253 6,907 44,542 90,587 10,088 4,751 1,506 9,941 156 499 3,609 7,492 542 389 2,133 6,837 179 359 707 8,161 812 375 (378) (16) (100) (100) 14,753 466 293 31,529 382 437 16,811 510 395 15,570 270 400 — — — — — — — — — — — — 27,706(c) 57,976 3,024 3,901 21,626(c) 79,508 3,330 4,145 3,092(c) 7,756 1,130 436 (a) Assets are principally cash, investments, deferred taxes and other receivables. (b) Includes a $1.3 million pretax writeoff of assets related to the Fluent Systems product line. (c) Includes $182,000 of pretax gain on plant sale. 18 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 18 3/27/09 6:29:31 PM FINANCIAL REVIEW AND ANALYSIS Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to enhance overall ﬁnancial disclosure by providing management’s analysis of the key drivers of year-over-year changes in key ﬁnancial statement elements, business segment results, and the impact of accounting principles on the company’s ﬁnancial statements. This discussion should be read in conjunction with the company’s January 31, 2009 ﬁnancial statements and the accompanying notes. The MD&A is organized as follows: ● ● ● ● ● ● ● Executive Summary Results of Operations—Segment Analysis Outlook Liquidity and Capital Resources Off-balance Sheet Arrangements and Contractual Obligations Critical Accounting Estimates New Accounting Standards 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: Applied Technology (formerly Flow Controls), Engineered Films, Electronic Systems and Aerostar. Management uses a number of metrics to assess the company’s performance: ● ● ● ● Segment net sales, gross margin, and operating income Consolidated net sales, gross margin, operating income, net income, and earnings per share Capital expenditures Return on sales, assets, and equity The following discussion highlights the consolidated operating results. Segment operating results are more fully explained in the Results of Operations—Segment Analysis section. 2009 % change 2008 % change 2007 Financial highlights for ﬁscal years ended January 31, Dollars in thousands except per-share data Results of Operations Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,913 24.3% $ 46,394 $ 30,770 $ 1.70 20% 13% 11% 11% Free Cash Flow and Payments to Shareholders Cash flow from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash returned to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,037 (8,001) $ 31,036 $ 31,884 5,180 $ 37,064 Performance Measures Return on net sales (net income / net sales) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets (net income / average assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on beginning equity (net income / beginning equity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0% 21.1% 26.0% $233,957 8% $217,529 25 .3% $ 41,145 $ 27,802 $ 1 .53 7% 9% 10% $ 27,151 (6,635) $ 20,516 $ 7,966 592 $ 8,558 11 .9% 20 .8% 28 .3% 25 .2% $ 38,302 $ 25,441 $ 1 .39 $ 26,313 (16,522) $ 9,791 $ 6,507 4,201 $ 10,708 11 .7% 22 .5% 30 .1% RAVEN 2009 ANNUAL REPORT 19 58585_Financials.indd 19 3/27/09 6:29:31 PM FINANCIAL REVIEW AND ANALYSIS (continued) Results of Operations The company posted record sales, operating income, net income, diluted earnings per share, and operating cash ﬂow for ﬁscal 2009. The results were fueled by a strong agricultural market and new product introductions in the Applied Technology segment and, to a lesser extent, shipments under government contracts at Aerostar. The 20% increase in net sales is the result of year-over-year sales growth in Applied Technology (60%), Aerostar (57%), and Engineered Films (5%). The 13% rise in operating income is primarily the result of sales growth and positive operating leverage generated by Applied Technology. The increase in operating income fell short of the growth in sales as a result of negative operating leverage at Electronic Systems as sales volume slipped in the latest year due to the loss of a customer and the weak economy. In addition, Engineered Films margins contracted as competitive pricing pressures created by the slowdown in construction activity prevented the pass-through of increased plastic resin costs. After three very strong quarters in ﬁscal 2009, the fourth quarter was signiﬁcantly affected by the weakening economy and related declines in commodity prices. Fourth quarter sales of $59.9 million were up 3%, and net income was 22% lower than the fourth quarter of ﬁscal 2008. The collapse of construction and oil and gas drilling markets at Engineered Films pushed that segment into an operating loss. Weaker agricultural commodity prices reduced the growth rate in Applied Technology. Fiscal 2008 consolidated net sales increased 8% to $234.0 million from $217.5 million in ﬁscal 2007. The agricultural market was improving during the year, and the resulting 41% increase in Applied Technology sales boosted proﬁtability. Shipments of U.S. Army parachutes helped Aerostar’s turnaround from a relatively weak ﬁscal 2007 performance. A very strong ﬁscal 2007 at Engineered Films resulted from disaster ﬁlm shipments that did not repeat in ﬁscal 2008. The company reported year-over-year improvements in operating income, net income, diluted earnings per share, and operating cash ﬂow. Free Cash Flow and Payments to Shareholders The company continues to generate strong free cash ﬂow as a result of solid earnings, excellent cash ﬂow from operations, and modest capital expenditures. During ﬁscal 2009, $37.1 million was returned to shareholders through stock repurchases, quarterly dividends and a special dividend of $22.5 million paid in November 2008. Performance Measures The company continues to generate solid returns on net sales, average assets and beginning equity, which are important gauges of Raven’s ability to efﬁciently produce proﬁts. The return on sales dropped from 11.9% in ﬁscal 2008 to 11.0% in ﬁscal 2009, primarily as a result of pricing pressures at Engineered Films. RESULTS OF OPERATIONS—SEGMENT ANALYSIS Applied Technology Applied Technology provides electronic and Global Positioning System (GPS) products designed to reduce operating costs and improve yields for the agriculture market. Financial highlights for ﬁscal years ended January 31, Dollars in thousands Applied Technology Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 2009 $103,098 40.2% $ 33,884 % change 60% 77% 2008 $64,291 37 .9% $19,102 % change 41% 89% 2007 $45,515 32 .1% $10,111 APPLIED TECHNOLOGY Net Sales (dollars in millions) $103.1 Operating Income (dollars in millions) $33.9 Fiscal 2009 net sales of $103.1 million increased $38.8 million (60%) and operating income of $33.9 million increased $14.8 million (77%) over ﬁscal 2008. Fiscal 2009 fourth quarter net sales of $19.6 million increased $3.0 million (18%) and operating income of $5.3 million increased $752,000 (17%) over fourth quarter ﬁscal 2008 levels. $64.3 $45.5 $19.1 $10.1 2007 2008 2009 2007 2008 2009 20 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 20 3/27/09 6:29:32 PM Several factors contributed to the strong fourth quarter and fiscal 2009 results: ● Healthy global farm fundamentals. highs; however, agricultural market fundamentals remained strong and continued to influence growers’ capital investment decisions, increasing demand for Applied Technology precision agriculture equipment. Commodity prices were strong through the first nine months of the year but fell from their ● Investments in select global markets. fiscal 2008—during a period of 60% overall sales growth. International sales increased to 17% of segment sales in fiscal 2009 compared with 16% in ● Increased acceptance of precision agriculture. (standard, precision, steering, and Autoboom™) reflecting strong customer demand for flagship sprayer products as well as newer products such as the Cruizer™, a simple and affordable guidance system targeted at new entrants to the precision agriculture market. Double-digit year-over-year sales growth was achieved for all product categories ● Positive operating leverage. Gross margins of 40.2% in fiscal 2009 compared favorably to fiscal 2008 gross margins of 37.9%. Fiscal 2009 selling expense was $7.5 million, or 7.3% of net sales, compared with fiscal 2008 selling expense of $5.3 million, or 8.2% of net sales. These improvements reflect positive operating leverage generated through increased sales volume. Fiscal 2008 net sales of $64.3 million increased $18.8 million (41%) and operating income of $19.1 million rose $9.0 million (89%) over fiscal 2007. Fiscal 2008 results were primarily attributable to the following: ● Healthy global farm fundamentals. and other feed grains. Worldwide agricultural conditions were strong as a result of record prices for corn, soybeans ● Investments in select global markets. marketing expenditures in select global markets. Fiscal 2008 international sales increased 43% from fiscal 2007 as a result of sales and ● Increased acceptance of precision agriculture. by strong demand for anhydrous ammonia control systems. Standard sprayer control system deliveries were solid throughout the period, led ● Positive operating leverage. Fiscal 2008 selling expenses were $5.3 million or 8.2% of net sales compared with fiscal 2007 selling expenses of $4.5 million or 9.9% of net sales. These improvements reflect positive operating leverage generated through increased sales volume. Gross margins of 37.9% in fiscal 2008 compared favorably to fiscal 2007 gross margins of 32.1%. Engineered Films Engineered Films produces rugged reinforced plastic sheeting for industrial, construction, geomembrane and agricultural applications. Financial highlights for fiscal years ended January 31, Dollars in thousands Engineered Films Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margins . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . 2009 $89,858 16.1% % change 2008 % change 2007 5% $85,316 (6%) $91,082 24 .8% 29 .4% $10,919 (38%) $17,739 (24%) $23,440 ENGINEERED FILMS Net Sales (dollars in millions) $91.1 $89.9 $85.3 Operating Income (dollars in millions) $23.4 Fiscal 2009 net sales of $89.9 million increased $4.5 million (5%) while operating income of $10.9 million decreased $6.8 million (38%) versus fiscal 2008. $17.7 $10.9 2007 2008 2009 2007 2008 2009 RAVEN 2009 ANNUAL REPORT 21 FINANCIAL REVIEW AND ANALYSIS (continued) Fiscal 2009 results were primarily due to the following: ● Sales increased as a result of higher volume coupled with a modest increase in selling prices. Strong sales of Sales volume. pit and pond lining ﬁlms to the oil and gas market and higher agriculture sales were partially offset by a decline in sales to the manufactured housing market. ● Depressed margins reﬂected volatile material costs, increased price competition, and poor economic Margin contraction. conditions. Competitive pricing pressures, especially in the construction market, hindered the ability to pass on higher resin costs. This meant production costs outpaced increases in selling prices. Gross margins decreased from 24.8% in ﬁscal 2008 to 16.1% in ﬁscal 2009. ● Selling expenses. Fiscal 2009 selling expenses of $3.5 million were relatively ﬂat year-over-year. Fiscal 2009 fourth quarter net sales of $14.5 million decreased $5.7 million (28%) from the fourth quarter of ﬁscal 2008. In addition, the segment posted a fourth quarter ﬁscal 2009 operating loss of $178,000 compared with operating income of $3.4 million in the fourth quarter of ﬁscal 2008. Fiscal 2009 fourth quarter results were affected by the following; ● Dysfunctional credit markets and plunging asset values resulted in weak economic activity in the fourth Global recession. quarter of ﬁscal 2009. As a result of the reduction in economic activity, energy prices plunged, leading to the decline in the oil and gas exploration market. Similarly, as the ﬂow of credit slowed and economic uncertainty rose, the commercial construction markets suffered. Consequently, the two largest markets for Engineered Films were both depressed in the quarter. ● Sales volume. levels due to the factors mentioned above. Fourth quarter 2009 sales to the energy and construction markets fell nearly 30% below fourth quarter ﬁscal 2008 ● Margin contraction. materials purchased prior to the precipitous drop in commodity prices. Lower sales volume resulted in negative operating leverage, and margins were depressed by high-cost raw Fiscal 2008 net sales of $85.3 million decreased $5.8 million (6%) and operating income of $17.7 million was down $5.7 million (24%) from ﬁscal 2007. Fiscal 2008 results were driven by the following: ● Strong sales of pit and pond lining ﬁlms to the oil and gas market were led by increased drilling activity, Sales volume. reﬂecting high oil and gas prices. Increased shipments of vapor retarders resulted from higher market share and industry growth. These increases were offset by a $9.9 million decrease in disaster ﬁlm shipments due to a benign hurricane season. Sales declined to the manufactured housing market due to the economic challenges faced by that industry. ● Margin contraction. pricing pressures prevented the pass-through of increased resin costs in the form of higher selling prices. Selling prices decreased approximately 3% from ﬁscal 2007 despite higher raw material costs. Competitive ● Overhead. and second quarters of ﬁscal 2008 negatively affected ﬁscal 2008 gross margins compared with one year earlier. Increased depreciation and start-up costs associated with new extruders that were placed into service during the ﬁrst ● Selling expenses. costs offset by increased product development expense. Fiscal 2008 selling expenses of $3.4 million were unchanged from ﬁscal 2007, reﬂecting lower personnel 22 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 22 3/27/09 6:29:32 PM Electronic Systems Electronic Systems is a total-solutions provider of electronics manufacturing services, primarily to North American original equipment manufacturers. Financial highlights for ﬁscal years ended January 31, Dollars in thousands Electronic Systems Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margins . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . 2009 % change 2008 % change $61,983 (9%) $67,987 3% 11.3% 16 .9% 2007 $66,278 18 .0% ELECTRONIC SYSTEMS Net Sales (dollars in millions) $66.3 $68.0 $62.0 Operating Income (dollars in millions) $10.9 $10.4 $ 5,926 (43%) $10,365 (4%) $10,850 $5.9 Fiscal 2009 net sales of $62.0 million decreased $6.0 million (9%) and operating income of $5.9 million declined $4.4 million (43%) from ﬁscal 2008. Fiscal 2009 fourth quarter net sales of $16.1 million were off $450,000 (3%) and operating income of $2.2 million increased $299,000 (15%) from fourth quarter ﬁscal 2008. The ﬁscal 2009 fourth quarter and full-year comparative results reﬂected the following: 2007 2008 2009 2007 2008 2009 ● Hand-held bed control shipments have been negatively affected by lower consumer spending Slower consumer spending. on non-essential home-related products, indicating the inﬂuence of ﬁnancial uncertainty on consumer sentiment and a soft construction market. ● Loss of a customer. non-repeat close-out order. Prior year results included $7 million of sales to a former customer (which was acquired) and a proﬁtable ● Increased sales of aviation electronics. earlier. Strong sales of avionics partially offset the negative impact of the factors mentioned ● Negative operating leverage. favorable product mix. Third and fourth quarter operating expenses were reduced by consolidating manufacturing space, which led to improved gross margins in the second half of the year. Gross margins suffered as a result of negative operating leverage on lower sales and a less ● Selling expenses. Selling expenses of $1.1 million (1.7% of sales) were consistent with the prior year. Fiscal 2008 net sales of $68.0 million increased $1.7 million (3%) and operating income of $10.4 million decreased $485,000 (4%) versus ﬁscal 2007. Fiscal 2008 comparative results were primarily due to the following: ● Slower consumer spending. home-related products. Hand-held bed control shipments decreased as a result of lower consumer spending on non-essential ● Increased sales of aviation electronics. spending. Strong sales of avionics partially offset the negative impact of slower consumer ● Product mix. Gross proﬁt margins were negatively affected by a less favorable product mix. ● Selling expense. Selling expenses of $1.2 million (1.7% of sales) were consistent with the prior year. 58585_Financials.indd 23 3/27/09 6:29:33 PM RAVEN 2009 ANNUAL REPORT 23 FINANCIAL REVIEW AND ANALYSIS (continued) Aerostar Aerostar manufactures military parachutes, protective wear, custom-shaped inﬂatable products, and high-altitude aerostats for government and commercial research. Financial highlights for ﬁscal years ended January 31, Dollars in thousands Aerostar Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margins . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . 2009 % change 2008 % change $27,186 57% $17,290 18% 18.7% 12 .8% $ 4,219 180% $ 1,506 113% 2007 $14,654 10 .4% $ 707 AEROSTAR Net Sales (dollars in millions) $27.2 Operating Income (dollars in millions) $4.2 Fiscal 2009 net sales of $27.2 million increased $9.9 million (57%) and operating income of $4.2 million rose $2.7 million (180%) over ﬁscal 2008. Fourth quarter ﬁscal 2009 net sales of $10.2 million and operating income of $1.8 million compared favorably with fourth quarter ﬁscal 2008 net sales of $5.6 million and operating income of $689,000. $17.3 $14.7 $1.5 $0.7 Fiscal 2009 fourth quarter and full-year comparative results were primarily attributable to the following: 2007 2008 2009 2007 2008 2009 ● Shipments of protective wear and MC-6 parachutes increased year-over-year. Deliveries under the Government contracts. $20.7 million MC-6 Army parachute and $6.5 million protective wear contract began in the fourth quarter of ﬁscal 2008. Fourth quarter 2009 parachute sales included nearly $3 million of deliveries that were delayed from the prior quarter. ● Positive operating leverage. 2008, bolstered by increased MC-6 Army parachute and protective wear shipments. Gross margins of 18.7% in ﬁscal 2009 compared favorably with gross margins of 12.8% in ﬁscal ● Selling expenses. 2008, reﬂecting the beneﬁts of a higher sales volume. Fiscal 2009 selling expenses of $860,000 were 3.2% of net sales compared with 4.1% of net sales in ﬁscal Fiscal 2008 net sales of $17.3 million increased $2.6 million (18%) and ﬁscal 2008 operating income grew $799,000 (113%) over ﬁscal 2007. Fiscal 2008 comparative results were primarily attributable to the following: ● Government contracts. Regular shipments of protective wear and MC-6 parachutes began in the fourth quarter of ﬁscal 2008. ● Positive operating leverage. 2007. This reﬂected increased MC-6 Army parachute and protective wear shipments and higher research balloon proﬁts. Gross margins of 12.8% in ﬁscal 2008 compared favorably with gross margins of 10.4% in ﬁscal ● Selling expenses. of net sales in ﬁscal 2007, showing the beneﬁts of increased sales volume. Fiscal 2008 selling expenses were 4.1% of net sales compared with 5.6% Corporate Expenses (administrative expenses, income taxes, and interest income and other, net) NET OPERATING MARGIN (percent) 18.2% 17.6%17.6% 16.6% 16.6% Dollars in thousands Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses as a % of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 $8,502 3.0% $ 507 34.4% 2008 $7,467 3 .2% $1,079 34 .2% 2007 $6,806 3 .1% $ 533 34 .5% 15.2% Administrative expenses increased 14% in ﬁscal 2009 compared with ﬁscal 2008, as a result of higher compensation and professional service expense. Administrative expenses rose 10% in ﬁscal 2008 compared with ﬁscal 2007, and were primarily driven by higher compensation expense. 24 RAVEN 2009 ANNUAL REPORT 2004 2005 2006 2007 2008 2009 58585_Financials.indd 24 3/27/09 6:29:34 PM Fiscal 2009 “interest income and other, net” declined 53% from ﬁscal 2008, primarily as a result of lower interest income due to a decrease in interest rates. Fiscal 2008 “interest income and other, net” increased over 2007 as a result of higher average cash, cash equivalent, and short-term investment balances. The effective tax rate for ﬁscal 2009 was 34.4%, versus 34.2% for ﬁscal 2008 and 34.5% for ﬁscal 2007. The ﬁscal 2009 and 2008 tax rates were favorably affected by an increase in the U.S. federal tax deduction from income attributable to manufacturing activities, partially offset by higher state and local taxes. OUTLOOK Management anticipates a challenging and uncertain year in ﬁscal 2010. Sales and earnings are expected to fall short of the record levels achieved in ﬁscal 2009. The company’s outlook includes a continued downturn for the economy in ﬁscal 2010, and it factors in a long and slow recovery. Management intends to focus on optimizing performance regardless of the economic situation, and being ready to take advantage of opportunities as they present themselves. For the near term, this means growing the business at previous target rates is no longer the imperative. To preserve the resources that could be depleted by a recession, management plans to implement a new three-part strategy. First: protect the core. This means getting rid of everything that is non-core (from assets to product lines), defending core assets (such as businesses that have performed well in the past but will struggle in a recession), protecting core values and beliefs, and continuing to pay dividends to shareholders. Second: generate and preserve cash. This includes controlling the balance sheet and improving working capital turnover through tactics such as increasing inventory turns and cutting expenses. Third: continue to invest in quality initiatives when it comes to customers, suppliers, products and R&D. Applied Technology Applied Technology will seek to capitalize on previous investments in product development and domestic and international expansion. It plans to accomplish this by leveraging its position as a total precision solutions provider (GPS steering devices, planting and spraying controls and data collection) and by capitalizing on increased acceptance of precision agriculture as an essential means of softening the impact of volatile input costs. Engineered Films Engineered Films was severely affected by the freefall in ﬁscal 2009 fourth quarter business activity, reﬂecting the global recession, plunging oil prices and a drop in construction activity. This business depends on increased penetration of existing markets and the introduction of innovative products. The segment continues to market new products such as FeedFresh™ sileage covers and VaporBlock Plus™ radon barriers. Ultimately, Engineered Films is dependent on the reversal of the severe economic contraction, particularly in the oil and gas drilling and construction markets. Electronic Systems Sales of printed circuit board assemblies for the aviation industry and secure communication devices for government agencies are expected to be more recession-resistant than consumer bed control sales. Aerostar Continued shipments under the MC-6 Army parachute contract, and sales of high-altitude airships and aerostats are expected to be relatively secure from the current recession. 58585_Financials.indd 25 3/27/09 6:29:34 PM RAVEN 2009 ANNUAL REPORT 25 FINANCIAL REVIEW AND ANALYSIS (continued) LIQUIDITY AND CAPITAL RESOURCES Cash Position Cash, cash equivalents, and short-term investments totaled $16.3 million at January 31, 2009, a $6.5 million decrease from $22.8 million on the same date in 2008. Management expects that current cash, combined with continued positive operating cash ﬂows and the company’s short-term line of credit, will be sufﬁcient to fund day-to-day operations. Raven’s uncollateralized credit agreement provides an $8.0 million line of credit. The credit line is expected to be renewed during ﬁscal 2010, as the maturity date on the current line of credit is July 1, 2009. Management anticipates that its capital spending in ﬁscal 2010 will not exceed $6 million. The company’s cash needs are seasonal, with working capital demands strongest in the ﬁrst quarter. Operating Activities Fiscal 2009 cash provided by operating activities was $39.0 million, an increase of $11.9 million from $27.2 million in ﬁscal 2008. The improvement in ﬁscal 2009 operating cash ﬂows versus one year earlier was due primarily to company earnings, improved inventory levels and a higher accounts payable balance. Inventory declined to $36.0 million in ﬁscal 2009 from $36.5 million in ﬁscal 2008. Lower Engineered Films inventories were partially offset by higher levels at Applied Technology. Accounts payable at January 31, 2009, of $9.4 million was up 13% from one year ago, reﬂecting more favorable payment terms. Partially offsetting these cash ﬂow improvements was cash consumed to ﬁnance higher accounts receivable. Accounts receivable rose from $36.5 million in ﬁscal 2008 to $40.3 million at January 31, 2009, with Applied Technology sales growth and seasonal payment terms offered to the agricultural market accounting for the majority of the increase. Fiscal 2009 bad debt expense of $629,000 was up $538,000 from the prior year. This reﬂected speciﬁc customer receivable writeoffs, as well as additional reserves for increased international exposure. Fiscal 2008 cash provided by operating activities was $27.2 million, an $838,000 increase compared with operating cash inﬂows in ﬁscal 2007. The ﬁscal 2008 improvement was due primarily to company earnings and increases in the accounts payable and accrued liabilities balances at year-end, partially offset by higher inventory and accounts receivable levels. As of January 31, 2008, accounts receivable and inventory balances increased by $5.2 million and $8.5 million, respectively, in support of Applied Technology growth. Investing Activities Cash used in investing activities was $7.0 million in ﬁscal 2009, $4.4 million in ﬁscal 2008, and $18.7 million in 2007. The change between ﬁscal 2009 and 2008 was primarily due to higher capital expenditures to support the increased manufacturing requirements of Applied Technology. The change between ﬁscal 2008 and 2007 was mostly due to a ﬂuctuation in capital investment. Fiscal 2008 capital expenditures of $6.6 million decreased from the prior year’s $16.5 million, when $13.3 million was invested in Engineered Films manufacturing capacity and facilities. As part of the company’s strategy to preserve cash, capital expenditures are expected to be less than $6 million in ﬁscal 2010, and that will be closely monitored. CASH FLOWS FROM OPERATIONS (dollars in millions) $39.0 $26.3 $27.2 $21.2 $19.7 $18.9 2004 2005 2006 2007 2008 2009 26 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 26 3/27/09 6:29:34 PM Financing Activities Cash consumed by ﬁnancing activities was $37.0 million in ﬁscal 2009, $8.3 million in ﬁscal 2008, and $10.3 million in ﬁscal 2007. The change between ﬁscal 2009 and 2008 was the result of an increase in dividends and stock repurchases. The ﬁscal 2009 quarterly dividend of 13 cents per share increased from 11 cents per share one year earlier. In addition to the quarterly dividend, a special dividend of $1.25 per share was paid during the fourth quarter of ﬁscal 2009. The special dividend was in response to the company’s strong cash position and commitment to return excess cash to shareholders. The change between ﬁscal 2008 and ﬁscal 2007 was due to a reduction in repurchases of the company’s stock, partially offset by an increase in the quarterly dividend. Repurchases of the company’s common stock totaled $5.2 million (161,100 shares) in ﬁscal 2009, $592,000 (20,150 shares) in ﬁscal 2008, and $4.2 million (146,247 shares) in ﬁscal 2007. The company has suspended repurchases of common stock, which, along with lower expected capital investments, is expected to help protect quarterly dividend payments throughout ﬁscal 2010. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As of January 31, 2009, the company is obligated to make cash payments in connection with its non-cancelable operating leases for facilities and equipment, and unconditional purchase obligations—primarily for raw materials—in the amounts listed below. The company has no off-balance sheet debt or other unrecorded obligations other than the items noted in the following table. In addition to the commitments noted there, standby letters of credit totaling $1.3 million have been issued, primarily to support self-insured workers compensation bonding requirements. 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, would be more expensive, and would require additional cash outlays. Management believes the chances of this are remote. A summary of the obligations and commitments at January 31, 2009, and for the next ﬁve years is shown below. Dollars in thousands Contractual Obligations: Line of credit(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unconditional purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . Uncertain tax positions(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ — 462 4,840 39,034 — $44,336 Less than 1 year 1-3 years 3-5 years $ — 264 203 39,034 — $39,501 $ — 198 479 — — $677 $ — — 546 — — $546 More than 5 years $ — — 3,612 — — $3,612 RETURN ON AVERAGE ASSETS (percent) 24.9% 21.3% 22.5% 20.8%21.1% 18.2% (a) $8.0 million line bears interest at 2.25% as of January 31, 2009, and expires July 2009. The line of credit is reduced by outstanding letters of credit totaling $1.3 million. (b) The total liability for uncertain tax positions under FIN 48 at January 31, 2009, was $2.9 million. The company is not able to reasonably estimate the timing of future payments relating to non-current tax benefits. 2004 2005 2006 2007 2008 2009 58585_Financials.indd 27 3/27/09 6:29:35 PM RAVEN 2009 ANNUAL REPORT 27 FINANCIAL REVIEW AND ANALYSIS (continued) CRITICAL ACCOU TING N ESTIMATES Critical accounting policies are those 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 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 the company’s 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 does not enter into derivatives or other ﬁnancial instruments for trading or speculative purposes. However, Raven has used derivative ﬁnancial instruments to manage the economic impact of ﬂuctuations in currency exchange rates on transactions that are denominated in currency other than its functional currency, which is the U.S. dollar. The use of these ﬁnancial instruments had no material effect on the company’s ﬁnancial condition, results of operations or cash ﬂows. Inventories Raven’s most signiﬁcant accounting judgment is determining inventory value at the lower of cost or market. The company estimates inventory valuation each quarter. Typically, when a product reaches the end of its lifecycle, 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 Electronic Systems, the company typically has recourse to customers for obsolete or excess material. When Electronic Systems customers authorize inventory purchases, especially with long lead-time items, they are required to take delivery of unused material or compensate the company accordingly. In every Raven operating unit, 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 on 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. BOOK VALUE PER SHARE (dollars) 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 writeoff experience by segment, and an estimate of the collectibility of any known problem accounts. Factors that 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. $5.45 $4.67 $3.68 $3.67 $6.52 $6.30 Revenue Recognition The company recognizes and records revenue when products are shipped because there is persuasive evidence of an arrangement, the sales price is determinable, collectibility is reasonably assured, and delivery has occurred. Estimated returns, sales allowances or warranty charges are recognized upon shipment of a product. The company sells directly to customers or distributors that incur the expense and commitment for any post-sale obligations beyond stated warranty terms. Self-insurance Reserves 2004 2005 2006 2007 2008 2009 Raven 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. 28 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 28 3/27/09 6:29:35 PM Goodwill and Long-lived Assets Management 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, Raven performs impairment reviews annually by reporting units, which are the company’s reportable segments. The one exception is 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 projected future cash flows, including timing and the risks inherent in future cash flows, perpetual growth rates, and determination of appropriate market comparables. Uncertain Tax Positions Accounting for tax positions requires judgments, including estimating reserves for uncertainties associated with the interpretation of income tax laws and regulations, and the resolution of tax positions with tax authorities after discussions and negotiations. The ultimate outcome of these matters could result in material favorable or unfavorable adjustments to the consolidated financial statements. NEW ACCOUNTING STANDARDS At the beginning of fiscal 2009, the company adopted SFAS No. 157, Fair Value Measurement. The standard provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The adoption of SFAS No. 157 did not have a material impact on the company’s consolidated results of operations, financial condition or cash flows. At the beginning of fiscal 2009, the company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The adoption of SFAS No. 159 did not have a material impact on the company’s consolidated results of operations, financial condition or cash flows. At the beginning of fiscal 2009, the company adopted SFAS No. 141(R), Business Combinations, which changes the accounting for business acquisitions. SFAS No. 141(R) requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It also requires acquisition-related costs to be expensed as incurred, restructuring costs to generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to affect income tax expense. SFAS No. 141(R) had no immediate impact upon adoption by the company, but will affect business combinations closing after February 1, 2009. In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The company does not anticipate that the adoption of SFAS No. 161 will have a material effect on its consolidated results of operations, financial condition or cash flows. In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets, which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets, and (2) intangible assets acquired in both business combinations and asset acquisitions. Under FSP No. FAS 142-3, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. FSP No. FAS 142-3 is effective as of the beginning of the company’s 2010 fiscal year. The company does not anticipate that the adoption of FSP No. 142-3 will have a material effect on its consolidated results of operations or financial condition. RAVEN 2009 ANNUAL REPORT 29 MONTHLY CLOSING STOCK PRICE AND VOLUME e c i r P 50 40 30 20 10 0 Feb08 Mar08 Apr08 May08 Jun08 Jul08 Aug08 Sep08 Oct08 Nov08 Dec08 Jan09 Shares Traded (in thousands) Closing Stock Price (in dollars) QUARTERLY INFORMATION (Unaudited) e m u l o V 3000 1500 0 Net Sales Gross Profit Operating Income Dollars in thousands except per-share data FISCAL 2009 First Quarter . . . . . $ 75,166 $22,015 $16,641 $16,759 $10,882 $0.60 $0.60 $32.80 $25.94 $0.13 0.13 10,488 Second Quarter . . . 0.13 12,548 Third Quarter . . . . . 1.38(b) Fourth Quarter . . . . 7,106 Total Year . . . . . . . . $279,913 $67,881 $46,394 $46,901 $30,770 $1.71 $1.70 $47.82 $20.60 $1.77 69,278 75,538 59,931 10,312 12,371 7,070 15,786 18,001 12,079 39.50 47.82 33.24 29.46 25.79 20.60 6,815 8,385 4,688 0.38 0.46 0.26 0.38 0.47 0.26 Net Income Pretax Income High Net Income Per Share(a) Basic Diluted Common Stock Market Price Low Cash Dividends Per Share FISCAL 2008 First Quarter . . . . . . . $ 58,103 55,653 Second Quarter . . . . 61,842 Third Quarter . . . . . . 58,359 Fourth Quarter . . . . . Total Year . . . . . . . . . $233,957 FISCAL 2007 First Quarter . . . . . . . $ 58,465 50,381 Second Quarter . . . . 57,435 Third Quarter . . . . . . Fourth Quarter . . . . . 51,248 Total Year . . . . . . . . . $217,529 $17,374 13,407 15,299 13,068 $59,148 $12,838 8,543 10,940 8,824 $41,145 $13,025 8,857 11,254 9,088 $42,224 $ 8,540 5,843 7,398 6,021 $27,802 $15,891 12,183 14,480 12,328 $54,882 $11,477 7,872 10,540 8,413 $38,302 $11,615 7,937 10,713 8,570 $38,835 $ 7,502 5,127 6,968 5,844 $25,441 $0 .47 0 .32 0 .41 0 .33 $1 .54 $0 .41 0 .28 0 .39 0 .32 $1 .41 $0 .47 0 .32 0 .41 0 .33 $1 .53 $0 .41 0 .28 0 .38 0 .32 $1 .39 $30 .84 39 .36 45 .85 42 .75 $45 .85 $42 .16 42 .70 32 .64 35 .35 $42 .70 $26 .20 28 .39 33 .42 27 .57 $26 .20 $31 .22 25 .89 25 .89 25 .46 $25 .46 $0 .11 0 .11 0 .11 0 .11 $0 .44 $0 .09 0 .09 0 .09 0 .09 $0 .36 (a) Net income per share is computed discretely by quarter and may not add to the full year. (b) A special dividend of $1.25 per share was paid during the fourth quarter of fiscal 2009. 30 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 30 3/27/09 6:29:36 PM 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, 2009, our internal control over ﬁnancial reporting was effective. The effectiveness of our internal control over ﬁnancial reporting as of January 31, 2009, 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 Ronald M. Moquist President & Chief Executive Ofﬁcer Thomas Iacarella Thomas Iacarella Vice President & Chief Financial Ofﬁcer March 24, 2009 58585_Financials.indd 31 3/27/09 6:29:37 PM RAVEN 2009 ANNUAL REPORT 31 CONSOLIDATED BALANCE SHEETS Dollars in thousands, except per-share data ASSETS Current assets 2009 As of January 31 2008 2007 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,267 — 40,278 35,977 2,542 3,009 98,073 35,880 7,450 3,012 $144,415 $ 21,272 1,500 36,538 36,529 2,075 2,955 100,869 35,743 6,902 4,347 $147,861 $ 6,783 4,000 31,336 28,071 1,761 1,268 73,219 36,264 6,604 3,677 $119,764 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,433 13,281 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608 Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,322 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares, par value $1 .00 per share Authorized—100,000,000 Outstanding—2009: 18,012,251; 2008: 18,120,513 2007: 18,039,223 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . $144,415 113,556 7,537 $ 8,374 12,804 930 22,108 $ 6,093 9,579 792 16,464 7,478 5,032 118,275 98,268 $147,861 $119,764 The accompanying notes are an integral part of the consolidated financial statements. 32 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 32 3/27/09 6:29:37 PM CONSOLIDATED STATEMENTS OF INCOME Dollars in thousands, except per-share data Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the years ended January 31 2008 $233,957 2009 $279,913 2007 $217,529 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,032 174,809 162,647 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,881 59,148 54,882 Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . 21,487 18,003 16,580 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,394 41,145 38,302 Interest income and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (507) (1,079) (533) Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,901 42,224 38,835 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,131 14,422 13,394 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,770 $ 27,802 $ 25,441 Net income per common share: — Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.71 — Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 1 .54 $ 1 .53 $ 1 .41 $ 1 .39 The accompanying notes are an integral part of the consolidated financial statements. 58585_Financials.indd 33 3/27/09 6:29:37 PM RAVEN 2009 ANNUAL REPORT 33 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME Paid-in Dollars in thousands, except per-share data capital Balance January 31, 2006 . . . . . . . . . . . $ 32,194 $ 1,401 $1 Par common stock Accumulated other comprehensive income (loss) Retained earnings Treasury stock Shares Cost (14,121,186) $ (43,389) $ 94,170 $ Total 13 $ 84,389 Net income . . . . . . . . . . . . . . . . . . . . Foreign currency translation . . . . . . . Total comprehensive income . . . . . . . Adoption of SFAS No .158, net of $1,015 income tax . . . . . . . Dividends ($ .36 per share) . . . . . . . . Purchase of stock . . . . . . . . . . . . . . . Stock surrendered upon exercise of stock options . . . . . . . . . . . . . . Employees’ stock options exercised . Share-based compensation . . . . . . . . Tax benefit from exercise of stock options . . . . . . . . . . . . . . Balance January 31, 2007 . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . Postretirement benefits, net of $84 income tax . . . . . . . . . . Foreign currency translation . . . . . . . Total comprehensive income . . . . . . . Adoption of FIN 48 . . . . . . . . . . . . . . Dividends ($ .44 per share) . . . . . . . . Purchase of stock . . . . . . . . . . . . . . . Stock surrendered upon exercise of stock options . . . . . . . . . . . . . . Employees’ stock options exercised . Share-based compensation . . . . . . . . Tax benefit from exercise of stock options . . . . . . . . . . . . . . Balance January 31, 2008 . . . . . . . . . . . — — — — — — — — 1 — — — — — 25,441 — — (21) — — (146,247) — — (4,201) — (6,508) — (1,885) — — (28) 141 — (854) 718 605 — — — — — — — — — — — — 25,441 (21) 25,420 (1,885) (6,507) (4,201) (882) 859 605 — 32,307 470 2,341 — (14,267,433) — (47,590) — 113,103 — (1,893) 470 98,268 — — — — — — — — — — 4 — (47) 148 — (1,462) 1,170 904 — — — — — (20,150) — — — — — — — — (592) — — — 27,802 — 27,802 — — (716) (7,970) — — — — 156 131 — — — — — — 156 131 28,089 (716) (7,966) (592) (1,509) 1,318 904 — 32,408 479 3,436 — (14,287,583) — (48,182) — 132,219 — (1,606) 479 118,275 — — — — — — Net income . . . . . . . . . . . . . . . . . . . . Postretirement benefits, net of $375 income tax . . . . . . . . . Foreign currency translation . . . . . . . Total comprehensive income . . . . . . . Dividends ($ .52 per share) . . . . . . . . Dividends (special–$1 .25 per share) . Purchase of stock . . . . . . . . . . . . . . . Stock surrendered upon exercise of stock options . . . . . . . . . . . . . . Employees’ stock options exercised . Share-based compensation . . . . . . . . Tax benefit from exercise 128 of stock options . . . . . . . . . . . . . . Balance January 31, 2009 . . . . . . . . . $32,461 $4,531 (34) 83 4 (1,258) 1,176 1,024 — — — 7 18 — — — — — — — — 30,770 — 30,770 — — 698 (246) — — (161,100) — — (5,180) (9,381) (22,528) — — — — — — — — — — — — — — — — 698 (246) 31,222 (9,374) (22,510) (5,180) (1,292) 1,259 1,028 128 (14,448,683) $(53,362) $131,080 $(1,154) $113,556 — — — — The accompanying notes are an integral part of the consolidated financial statements. 34 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 34 3/27/09 6:29:37 PM For the years ended January 31 2007 2008 2009 $30,770 $27,802 $25,441 CONSOLIDATED STATEMENTS OF CASH FLOWS 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 . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in operating assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,345 413 629 216 1,028 (1,346) (18) 39,037 (8,001) (2,100) 3,600 (499) (7,000) Cash flows from financing activities: Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefit on stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . Other financing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,884) (5,180) 128 (33) (36,969) 6,944 400 91 (779) 904 (8,187) (24) 27,151 (6,635) (3,100) 5,600 (298) (4,433) (7,966) (592) 479 (191) (8,270) 5,445 440 40 (293) 605 (5,380) 15 26,313 (16,522) (6,000) 4,000 (142) (18,664) (6,507) (4,201) 470 (39) (10,277) Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73) 41 2 Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,005) 21,272 $16,267 14,489 6,783 $21,272 (2,626) 9,409 $ 6,783 The accompanying notes are an integral part of the consolidated financial statements. 58585_Financials.indd 35 3/27/09 6:29:37 PM RAVEN 2009 ANNUAL REPORT 35 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 subsidiar- ies (the company or Raven). 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. Raven oper- ates three divisions (Applied Technology [formerly known as Flow Controls], Engineered Films and Electronic Systems) in addition to three wholly owned subsidiaries: Aerostar International, Inc. (Aerostar); Raven Industries Canada, Inc. (Raven Canada); and Raven Industries GmbH (Raven GmbH). All signiﬁcant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES Preparing 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. These affect the reported amounts of assets and liabilities as of the date of the ﬁnancial state- ments and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. FOREIGN CURRENCY The company’s subsidiaries that operate outside the United States use the local currency as their functional currency. The functional currency is translated into U.S. dollars for balance sheet accounts using the period-end exchange rates, and aver- age exchange rates for the statement of income. Adjustments resulting from ﬁnancial statement translations are included as foreign currency 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 “interest income and other, net” in the Consolidated Statements of Income. CASH AND CASH EQUIVALENTS The company considers all highly liquid debt instruments with original maturities of three or fewer months to be cash equivalents. Cash and cash equivalent balances are principally concentrated in checking, money market and sweep accounts with Wells Fargo Bank, Wells Fargo Brokerage Services, LLC., and Merrill Lynch & Co. (Bank of America). 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. This is based on historical writeoff experience by segment and an estimate of the collectibility of any known problem accounts. 36 RAVEN 2009 ANNUAL REPORT INVENTORY VALUATION Inventories are stated at the lower of cost or market, with cost determined on the ﬁrst-in, ﬁrst-out basis. Market value encom- passes 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: Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing equipment by segment 15 - 39 years Applied Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Engineered Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electronic Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aerostar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, fixtures, office equipment and other . . . . . . . . . . . . . . . . 3 - 5 years 5 - 12 years 3 - 5 years 3 - 5 years 3 - 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 Raven recognizes goodwill as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is tested for impairment on an annual basis during the fourth quarter, and between annual tests whenever there is an impairment indicated. Impairment tests of goodwill are performed at the reporting unit level. Fair values are estimated based on discounted cash ﬂows and are compared with the corresponding carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying amount, the amount of the impairment loss must be measured and then recognized to the extent the carrying value exceeds the implied fair value. LONG-LIVED ASSETS The company periodically assesses the recoverability of long- lived and intangible assets. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash ﬂows used in determining the fair value of the assets. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. 58585_Financials.indd 36 3/27/09 6:29:37 PM INSURANCE OBLIGATIONS Raven employs insurance policies to cover workers’ compen- sation 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 insurance policy beneﬁt 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 esti- mate 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 reason- ably estimated. While the settlement of any claims cannot be determined at this time, management believes that any liability resulting from these claims will be substantially covered by insurance. Accordingly, management does not believe that the ultimate outcome of these matters will have a signiﬁcant impact on its results of operations, ﬁnancial position or cash ﬂows. REVENUE RECOGNITION Raven recognizes revenue when products are shipped because there is persuasive evidence of an arrangement, the sales price is determinable, collectability is reasonably assured, and delivery has occurred. 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, sales allowances or warranty charges are recognized upon shipment of a product. Shipping and handling costs are classiﬁed as a component of “cost of goods sold.” WARRANTIES Accruals necessary for product warranties are estimated based on historical warranty costs and average time elapsed between purchases and returns for each division. Additional accruals are made for any signiﬁcant, discrete warranty issues. RESEARCH AND DEVELOPMENT Research and development expense (principally, labor and material costs) was $5.8 million, $4.4 million and $2.6 million for ﬁscal 2009, 2008, and 2007, respectively. SHARE-BASED COMPENSATION The company records compensation expense related to its share-based compensation plans using the fair value method. INCOME TAXES 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 affect taxable income. Deferred tax assets are reduced by a valuation allow- ance to reﬂect realizable value, when necessary. Accruals are maintained for uncertain tax positions. NEW ACCOUNTING STANDARDS At the beginning of ﬁscal 2009, the company adopted SFAS No. 157, Fair Value Measurement. The standard provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 clariﬁes the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The adoption of SFAS No. 157 did not have a material impact on the company’s consolidated results of operations, ﬁnancial condition or cash ﬂows. At the beginning of ﬁscal 2009, the company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many ﬁnancial instruments and certain other items at fair value. The adoption of SFAS No. 159 did not have a material impact on the company’s consolidated results of operations, ﬁnancial condition or cash ﬂows. At the beginning of ﬁscal 2009, the company adopted SFAS No. 141(R), Business Combinations, which changes the accounting for business acquisitions. SFAS No. 141(R) requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consider- ation at their fair value on the acquisition date. It also requires acquisition-related costs to be expensed as incurred, restruc- turing costs to generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to affect income tax expense. SFAS No. 141(R) had no immediate impact upon adoption by the company, but will affect business combina- tions closing after February 1, 2009. In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities–an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclo- sures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s ﬁnancial position, ﬁnancial performance and cash ﬂows. SFAS No. 161 is effective for ﬁnancial statements issued for ﬁscal years and interim periods beginning after November 15, 2008. The company does not anticipate that the adoption of SFAS No. 161 will have a mate- rial effect on its consolidated results of operations, ﬁnancial condition or cash ﬂows. In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets, which amends the list of factors an entity should consider in devel- oping renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. The new guidance RAVEN 2009 ANNUAL REPORT 37 58585_Financials.indd 37 3/27/09 6:29:37 PM NOTES TO FINANCIAL STATEMENTS (continued) Note 3. Supplemental Cash Flow Information For the years ended January 31 2007 2008 2009 Dollars in thousands Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . $ (4,603) $ (5,216) $ (2,097) (262) Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (284) Prepaid expenses and other assets . . . . . . . . (1,770) Accounts payable . . . . . . . . . . . . . . . . . . . . . (1,045) Accrued and other liabilities . . . . . . . . . . . . . 78 Customer advances . . . . . . . . . . . . . . . . . . . $ (1,346) $ (8,187) $ (5,380) (8,403) 218 2,437 2,648 129 447 (35) 963 2,194 (312) Cash paid during the year for Income taxes . . . . . . . . . . . . . . . . . . . . . . . $15,072 $14,068 $13,759 Note 4. Goodwill and Other Intangibles Goodwill The changes in the carrying amount of goodwill by reporting segment are shown below: Applied Technology $ 5,408 Dollars in thousands Balance at January 31, 2006 . . . . Acquisition earn-outs . . . . . . . . . Balance at January 31, 2007 . . . . Acquisition earn-outs . . . . . . . . . Balance at January 31, 2008 . . . . Acquisition earn-outs . . . . . . . . . Balance at January 31, 2009 . . $6,457 Engineered Electronic Systems $ 433 — 433 — 433 — $433 Films $ 96 203 — 96 298 — 96 548 — $96 5,611 5,909 Aerostar $ 464 — 464 — 464 — $464 Total $ 6,401 203 6,604 298 6,902 548 $7,450 Intangible Assets Estimated future amortization expense based on the current carrying value of amortizable intangible assets for ﬁscal periods 2010 through 2014 is $441,000, $414,000, $383,000, $30,000, and $24,000, respectively. Note 5. Employee Retirement Benefits The company has a 401(k) plan covering substantially all employees and contributed 3% of qualiﬁed payroll. Raven’s contribution expense was $1,158,000, $1,020,000, and $935,000 for ﬁscal 2009, 2008 and 2007, respectively. In addition, the company provides postretirement medical and other beneﬁts to senior executive ofﬁcers and senior managers. There are no assets held for the plans and any obligations are covered through operating cash and invest- ments. Raven accounts for these beneﬁts in accordance with SFAS No. 106, Accounting for Postretirement Beneﬁts Other Than Pensions. At January 31, 2007, the company adopted SFAS No. 158, Employers’ Accounting for Deﬁned Pension and Other Postretirement Plans. This statement requires the company to fully recognize the liability for its postretirement beneﬁts through changes in accumulated other comprehensive income (loss). applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under FSP No. FAS 142-3, entities estimating the useful life of a recognized intangible asset must consider their historical expe- rience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or exten- sion. FSP No. FAS 142-3 is effective as of the beginning of the company’s 2010 ﬁscal year. The company does not anticipate that the adoption of FSP No. 142-3 will have a material effect on its consolidated results of operations or ﬁnancial condition. Note 2. Selected Balance Sheet Information Following are the components of selected balance sheet items: As of January 31 2008 2007 Dollars in thousands Accounts receivable, net: Trade accounts . . . . . . . . . . . . . . . . . . . . . . . $40,891 (613) Allowance for doubtful accounts . . . . . . . . . $40,278 2009 Inventories, net: Finished goods . . . . . . . . . . . . . . . . . . . . . . . $ 6,062 3,258 In process . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,657 Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,977 Other current assets: Insurance policy benefit . . . . . . . . . . . . . . . . $ 2,119 890 Prepaid expenses and other . . . . . . . . . . . . . $ 3,009 Property, plant and equipment, net: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,227 22,593 Buildings and improvements . . . . . . . . . . . . . 62,504 Machinery and equipment . . . . . . . . . . . . . . (50,444) Accumulated depreciation . . . . . . . . . . . . . . $35,880 Other assets, net: Amortizable assets: Purchased technology . . . . . . . . . . . . . . . . $ 2,300 1,314 Other intangibles . . . . . . . . . . . . . . . . . . . (2,143) Accumulated amortization . . . . . . . . . . . . 1,471 1,482 59 $ 3,012 Deferred income taxes . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities: Salaries and benefits . . . . . . . . . . . . . . . . . . $ 1,891 2,581 Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333 401(k) contributions . . . . . . . . . . . . . . . . . . . 3,615 Insurance obligations . . . . . . . . . . . . . . . . . . 436 Profit sharing . . . . . . . . . . . . . . . . . . . . . . . . 1,004 Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,266 Taxes–accrued and withheld . . . . . . . . . . . . 1,155 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,281 Other liabilities: Postretirement benefits . . . . . . . . . . . . . . . . $ 4,637 2,900 Uncertain tax positions . . . . . . . . . . . . . . . . $ 7,537 38 RAVEN 2009 ANNUAL REPORT $36,831 (293) $36,538 $31,594 (258) $31,336 $ 4,975 3,631 27,923 $36,529 $ 3,750 2,612 21,709 $28,071 $ 2,549 406 $ 2,955 $ 651 617 $ 1,268 $ 1,227 21,523 57,563 (44,570) $35,743 $ 1,227 21,494 52,552 (39,009) $36,264 $ 2,300 1,172 (1,740) 1,732 2,540 75 $ 4,347 $ 3,380 1,305 (2,729) 1,956 1,607 114 $ 3,677 $ 2,109 2,415 1,184 4,010 490 684 1,061 851 $12,804 $ 1,722 2,212 1,109 1,743 553 397 1,227 616 $ 9,579 $ 5,246 2,232 $ 7,478 $ 5,032 — $ 5,032 58585_Financials.indd 38 3/27/09 6:29:37 PM The incremental effect of applying SFAS No. 158 on the following balance sheet items as of January 31, 2007, was as follows: Impact of SFAS No . 158 Dollars in thousands Non-current deferred tax assets . . . . . . . . . $ 592 118,749 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 2,132 Other liabilities . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive Before Adjustment $ 1,015 1,015 2,900 After $ 1,607 119,764 5,032 Note 6. Warranties Changes in the warranty accrual were as follows: Dollars in thousands 2009 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . $ 684 2,760 Accrual for warranties . . . . . . . . . . . . . . . . . . . . . Settlements made (in cash or in kind) . . . . . . . . . (2,440) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . $1,004 As of January 31 2008 $ 397 1,390 (1,103) $ 684 2007 $ 569 1,317 (1,489) $ 397 income (loss) . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . (8) 100,153 (1,885) (1,885) (1,893) 98,268 The accumulated beneﬁt obligation for these beneﬁts is shown below: Note 7. Income Taxes The reconciliation of income tax computed at the federal statutory rate to the company’s effective income tax rate was as follows: Dollars in thousands Benefit obligation at beginning of year . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . Total recognized in net and other comprehensive income . . . . . . . . . . . . . . . . . . Retiree benefits paid . . . . . . . . . . . . . . . . . . . . . . Benefit obligation at end of year . . . . . . . . . . . . . For the years ended January 31 2008 $5,213 90 307 (2) 2009 $5,447 67 361 (847) 2007 $4,928 84 278 89 (419) (188) $4,840 395 (161) $5,447 (166) $5,213 Tax at U .S . federal statutory rate . . . . . . . . . . . . . . . State and local income taxes, net of U .S . federal benefit . . . . . . . . . . . . . . . . . . Tax benefit on qualified production activities . . . . . . Tax credit for research activities . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the years ended January 31 2008 35 .0% 2009 35.0% 2007 35 .0% 1.5 (2.0) (0.7) 0.7 34.4% 1 .5 (2 .1) (0 .7) 0 .5 34 .2% 1 .1 (1 .0) (0 .5) (0 .1) 34 .5% The liability and expense reﬂected in the balance sheet and income statement were as follows: Signiﬁcant components of the company’s income tax provision were as follows: Dollars in thousands Beginning liability balance . . . . . . . . . . . . . . . . . . Employer expense . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . Total recognized in net and other comprehensive income . . . . . . . . . . . . . . . . . . Initial effect of adopting SFAS No . 158 . . . . . . . . . Retiree benefits paid . . . . . . . . . . . . . . . . . . . . . . Ending liability balance . . . . . . . . . . . . . . . . . . . . Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term portion . . . . . . . . . . . . . . . . . . . . . . . . Assumptions used: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wage inflation rate . . . . . . . . . . . . . . . . . . . . . . . For the years ended January 31 2008 $5,213 635 (240) 2009 $5,447 654 (1,073) 2007 $1,883 596 — (419) — (188) 4,840 (203) $4,637 395 — (161) 5,447 (201) $5,246 2,900 (166) 5,213 (181) $5,032 7.00% 3.00% 6 .75% 4 .00% 6 .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 2009 was 8.97% compared with 10.38% and 9.64% for ﬁscal 2008 and 2007. The impact of a one-percentage-point change in assumed health care rates would not be signiﬁcant to the company’s income statement and would affect the ending liability balance by approximately $700,000. The rate to which the ﬁscal 2009 health care cost trend rate is assumed to decline is 5.50%, which is the ultimate trend rate. The ﬁscal year that the rate reaches the ultimate trend rate is expected to be ﬁscal 2029. Dollars in thousands Income taxes: Currently payable . . . . . . . . . . . . . . . . . . . . . $15,915 216 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,131 $15,201 (779) $14,422 $13,687 (293) $13,394 For the years ended January 31 2007 2008 2009 Deferred Tax Assets Deferred income taxes reﬂect the net effects of temporary differences between the carrying amounts of assets and liabili- ties for ﬁnancial reporting purposes and the amounts used for income tax purposes. Signiﬁcant components of the company’s deferred tax assets and liabilities were as follows: Dollars in thousands Current deferred tax assets: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . Insurance obligations . . . . . . . . . . . . . . . . . . . . . . Warranty obligations . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . Non-current deferred tax assets (liabilities): Postretirement benefits . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . As of January 31 2008 2009 2007 $ 211 408 840 489 352 242 2,542 $ 105 271 781 456 225 237 2,075 1,623 (1,556) 969 446 1,482 $4,024 1,836 (478) 741 441 2,540 $4,615 $ 91 240 711 357 139 223 1,761 1,758 (405) — 254 1,607 $3,368 RAVEN 2009 ANNUAL REPORT 39 58585_Financials.indd 39 3/27/09 6:29:37 PM NOTES TO FINANCIAL STATEMENTS (continued) Uncertain Tax Positions Effective February 1, 2007, Raven adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Upon its adoption, the company reported a net $716,000 increase in the liability for unrecog- nized tax beneﬁts, which was recorded as a reduction to the February 1, 2007 beginning retained earnings balance. At the adoption date, the company had gross unrecognized tax beneﬁts of $1.3 million ($1.6 million including interest and penalties). The following table summarizes the activity related to the gross unrecognized tax beneﬁts (excluding interest and penalties): Dollars in thousands Gross unrecognized tax benefits at beginning of year . . . . Increases in tax positions related to the current year . . . . . Decreases as a result of a lapse in applicable For the years ended January 31 2008 2009 $1,793 539 $1,328 465 statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross unrecognized tax benefits at end of year . . . . . . . . . (63) $2,269 — $1,793 During the ﬁscal year ended January 31, 2009, the only change to uncertain tax positions related to prior years resulted from the lapse of a statute of limitations. The company does not expect any signiﬁcant change in the amount of unrecognized tax beneﬁts in the next ﬁscal year. The total unrecognized tax beneﬁts that, if recognized, would affect the company’s effective tax rate were $1.5 million and $1.2 million as of January 31, 2009 and January 31, 2008, respectively. Raven recognizes interest and penalties accrued related to unrecognized tax beneﬁts in income tax expense. At January 31, 2009 and January 31, 2008, accrued interest and penalties were $631,000 and $439,000, respectively. The company ﬁles tax returns, including returns for its subsidiaries, with various federal, state, and local jurisdic- tions. Uncertain tax positions are related to tax years that remain subject to examination. As of January 31, 2009, federal tax returns ﬁled in the U.S., Canada and Switzerland for ﬁscal years ended January 31, 2006 - 2008 remain subject to examination by federal tax authorities. In state and local jurisdictions, tax returns for ﬁscal years ended January 31, 2003 - 2008 remain subject to examination by state and local tax authorities. Note 8. Financing Arrangements Raven has an uncollateralized credit agreement providing a line of credit of $8.0 million with a maturity date of July 1, 2009, bearing interest at 1.00% under the prime rate. Letters of credit totaling $1.3 million have been issued under the line, primarily to support self-insured workers’ compensa- tion bonding requirements. No borrowings were outstanding as of January 31, 2009, 2008 or 2007, and $6.7 million was available at January 31, 2009. There have been no borrowings under the credit line in the last three ﬁscal years. Wells Fargo Bank, N.A. provides Raven’s line of credit and holds the majority of its 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 facili- ties under operating leases. Total rent and lease expense was $353,000, $268,000, and $351,000 in ﬁscal 2009, 2008 and 2007, respectively. Future minimum lease payments under non-cancelable operating leases for ﬁscal periods 2010 to 2012 are $264,000, $176,000, and $22,000, respectively, with all leases scheduled to expire during ﬁscal 2012. Note 9. Share-based Compensation At January 31, 2009, Raven had two share-based compensa- tion plans, which are described below. The compensation cost for these plans was $1,028,000, $904,000, and $605,000 in ﬁscal 2009, 2008, and 2007, respectively. The related income tax beneﬁt recorded in the income statement was $153,000, $154,000, and $110,000 for ﬁscal 2009, 2008, and 2007, respectively. Compensation cost capitalized as part of inventory at January 31, 2009, 2008, and 2007 was $60,000, $54,000 and $40,000, respectively. 2000 Stock Option and Compensation Plan The 2000 Stock Option and Compensation Plan, approved by the shareholders, is administered by the Personnel and Compensation Committee of the board of directors and allows for stock awards and incentive or non-qualiﬁed options with terms not to exceed 10 years. Included in the ﬁscal 2009 compensation cost was $135,000 of expense recognized as a result of a stock award of 5,500 shares. There are 339,225 shares of the company’s common stock reserved for future stock awards and stock option grants under the plan at January 31, 2009. Options are granted with exercise prices not less than market value at the date of grant. The stock options vest over a four-year period and expire after ﬁve years. Options contain retirement and change in control provisions that may accelerate the vesting period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The company uses historical data to estimate option exercise and employee termination within the valuation model. 40 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 40 3/27/09 6:29:38 PM 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 2007 2008 2009 4 .45% 3 .07% 1.64% 1 .29% 2.12% 1 .28% 38 .97% 40 .62% 46.32% 4 .25 4 .25 4.25 Weighted average grant date fair value . . . . . $ 8.08 $11 .45 $ 9 .51 Option activity for the year ended January 31, 2009, was as follows: Stock units granted under this plan vest immediately and are expensed at the date of grant. Stock units are also accumulated if a director elects to defer the annual retainer paid for board service. When dividends are paid on the company’s common shares, stock units are added to the directors’ balances and a corresponding amount is removed from retained earnings. The intrinsic value of a stock unit is the fair value of the underly- ing shares. Outstanding stock units for the year ended January 31, 2009, were as follows: Weighted Aggregate intrinsic average value exercise (in 000s) price Number of options Weighted average remaining contractual term (years) Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred retainers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Converted into common shares . . . . . . . . . . . . . . . . . . . . . Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . Number of units 9,878 3,820 546 864 — 15,107 Weighted average price $30 .02 36 .65 36 .65 28 .92 — $21 .81 Outstanding at beginning of year . . . . . . . Granted . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . Outstanding at end of year . . . . . . . . . . . . Options exercisable at end of year . . . . . . . . . . . . 373,031 95,800 (83,456) (2,400) $25.96 24.51 15.09 31.26 382,975 $27.93 $ — 174,388 $27.39 $ — 2 .93 1 .82 The intrinsic value of a stock award is the amount by which the fair value of the underlying stock exceeds the exercise price of the award. The total intrinsic value of options exercised was $1.9 million, $3.5 million and $3.7 million during the years ended January 31, 2009, 2008 and 2007, respectively. As of January 31, 2009, the total compensa- tion cost for non-vested awards not yet recognized in the company’s statements of income was $1.4 million, net of the effect of estimated forfeitures. This amount is expected to be recognized over a weighted average period of 2.57 years. Deferred Stock Compensation Plan for Directors On May 23, 2006, the company’s stockholders approved the Deferred Stock Compensation Plan for Directors of Raven Industries, Inc. Under the plan, a stock unit is the right to receive one share of the company’s common stock as deferred compensation, to be distributed from an account established by the company in the name of the non-employee director. Stock units have the same value as a share of common stock but cannot be sold. Stock units are a component of the company’s equity. The plan reserves 50,000 common shares for the conversion of stock units into common stock after directors retire from the board. The plan is administered by the Governance Committee of the board of directors. Note 10. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted-average common shares and stock units outstanding. Diluted net income per share is computed by dividing net income by the weighted-average common and common equivalent shares outstanding (which includes the shares issuable upon exercise of employee stock options net of shares assumed purchased with the option proceeds) and stock units outstanding. Certain outstanding options were excluded from the diluted net income per-share calculations because their effect would have been anti-dilutive, as their exercise prices were greater than the average market price of the company’s common stock during those periods. For ﬁscal 2009, 2008, and 2007, 167,942, 90,338, and 96,075 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 2008 2009 2007 Numerator: Net income (in thousands) . . . . . . . . . $ 30,770 Denominator: Weighted average common $ 27,802 $ 25,441 shares outstanding . . . . . . . . . . . 18,031,020 18,099,600 18,082,606 Weighted average stock units outstanding . . . . . . . . . . . . . Denominator for basic calculation . . . . . . . . . . . . . 18,044,471 13,451 8,580 3,602 18,108,180 18,086,208 Weighted average common shares outstanding . . . . . . . . . . . 18,031,020 18,099,600 18,082,606 Weighted average stock units outstanding . . . . . . . . . . . . . Dilutive impact of stock options . . . . Denominator for diluted calculation . . . . . . . . . . . . 18,080,242 13,451 35,771 8,580 95,883 3,602 186,705 18,204,063 18,272,913 Net income per share–basic . . . . . . . $ 1.71 Net income per share–diluted . . . . . $ 1.70 $ 1 .54 $ 1 .53 $ 1 .41 $ 1 .39 RAVEN 2009 ANNUAL REPORT 41 58585_Financials.indd 41 3/27/09 6:29:38 PM NOTES TO FINANCIAL STATEMENTS (continued) Note 11. Business Segments and Major Customer Information The company’s reportable segments are deﬁned by their common technologies, production processes and inven- tories. These segments reﬂect Raven’s organization into three Raven divisions and the Aerostar subsidiary. Raven Canada and Raven GmbH are included in the Applied Technology Division. Applied Technology provides electronic and Global Positioning System (GPS) products designed to reduce operating costs and improve yields for the agriculture market. Engineered Films produces rugged reinforced plastic sheet- ing for industrial, construction, geomembrane and agriculture applications. Electronic Systems provides electronics manu- facturing services to avionics, secure communication and other markets. Aerostar manufactures military parachutes, protective wear, custom-shaped inﬂatable products and high-altitude aerostats for government and commercial research. The company measures the performance of its segments based on their operating income excluding 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 report- ing structure as required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. At the beginning of ﬁscal 2009, Raven revised the disclo- sure of each segments’ sales and operating income to reﬂect increased intersegment activity. Transactions between operat- ing segments are now eliminated in a separate caption entitled “intersegment eliminations” to arrive at consolidated sales, operating income, and assets. Business segment information is as follows: For the years ended January 31 2008 2009 2007 Dollars in thousands APPLIED TECHNOLOGY DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $103,098 33,884 Operating income . . . . . . . . . . . . . . . . . . 48,881 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,674 Capital expenditures . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . 1,383 ENGINEERED FILMS DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,858 10,919 Operating income . . . . . . . . . . . . . . . . . . 35,862 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,120 Capital expenditures . . . . . . . . . . . . . . . . 4,303 Depreciation & amortization . . . . . . . . . . $ 64,291 19,102 36,938 1,008 1,125 $ 85,316 17,739 43,688 4,012 4,046 $ 45,515 10,111 27,629 577 1,142 $ 91,082 23,440 41,988 13,266 2,887 $ 61,983 5,926 26,847 1,399 1,159 ELECTRONIC SYSTEMS DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . AEROSTAR Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,186 4,219 Operating income . . . . . . . . . . . . . . . . . . 8,744 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 Capital expenditures . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . 444 INTERSEGMENT ELIMINATIONS Sales Engineered Films Division . . . . . . . . . . Electronic Systems Division . . . . . . . . . Aerostar . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . REPORTABLE SEGMENTS TOTAL Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,913 54,896 Operating income . . . . . . . . . . . . . . . . . . 120,182 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,576 Capital expenditures . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . 7,289 CORPORATE & OTHER(a) Operating (loss) from administrative expenses . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . TOTAL COMPANY Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,913 46,394 Operating income . . . . . . . . . . . . . . . . . . 144,415 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,001 Capital expenditures . . . . . . . . . . . . . . . . 7,758 Depreciation & amortization . . . . . . . . . . 24,233 425 469 $ 67,987 10,365 25,865 1,077 1,237 $ 17,290 1,506 9,941 156 499 $233,957 48,612 116,332 6,253 6,907 $233,957 41,145 147,861 6,635 7,344 $ 66,278 10,850 25,175 1,357 1,086 $ 14,654 707 8,161 812 375 $ — — — — — $217,529 45,108 102,953 16,012 5,490 $ (6,806) 16,811 510 395 $217,529 38,302 119,764 16,522 5,885 $ (210) $ (533) (378) (16) (100) (100) (1,977) (25) (52) (152) $ (8,502) $ (7,467) 31,529 382 437 (a) Assets are principally cash, investments, deferred taxes and other receivables. Sales to a customer of the Electronic Systems segment accounted for 13%, 11%, and 10% of consolidated sales in ﬁscal 2009, 2008, and 2007, respectively, and 18%, 14% and 14%, of consolidated accounts receivable at the end of ﬁscal 2009, 2008, and 2007, respectively. Sales to countries outside the United States, primarily to Canada, were as follows: Dollars in thousands Applied Technology . . . . . . . . . . . . . . . . . . . . . $17,705 1,949 Engineered Films . . . . . . . . . . . . . . . . . . . . . . . 557 Electronic Systems . . . . . . . . . . . . . . . . . . . . . . Aerostar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966 Total foreign sales . . . . . . . . . . . . . . . . . . . . $21,177 For the years ended January 31 2007 2008 2009 $7,081 $10,104 2,060 1,803 8,718 6,852 868 1,310 $18,727 $20,069 Note 12. Quarterly Information (Unaudited) The company’s quarterly information is presented on page 30. 42 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 42 3/27/09 6:29:38 PM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Raven Industries, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash ﬂows present fairly, in all material respects, the ﬁnancial position of Raven Industries, Inc. and its subsidiaries at January 31, 2009, 2008 and 2007, and the results of their operations and their cash ﬂows for each of the three years in the period ended January 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over ﬁnancial reporting as of January 31, 2009 based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these ﬁnancial statements, for maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of internal control over ﬁnancial reporting, appearing on page 31 of the 2009 Annual Report to Shareholders in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these ﬁnancial statements and on the Company’s internal control over ﬁnancial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement and whether effective internal control over ﬁnancial reporting was maintained in all material respects. Our audits of the ﬁnancial statements included 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. Our audit of internal control over ﬁnancial reporting included obtaining an understanding of internal control over ﬁnancial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As described in Note 5 to the consolidated ﬁnancial statements, effective January 31, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement No. 158, Employers’ Accounting for Deﬁned Beneﬁt Pension and Other Postretirement Plans. As described in Note 7 to the consolidated ﬁnancial statements, effective February 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. 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 24, 2009 58585_Financials.indd 43 3/27/09 6:29:38 PM RAVEN 2009 ANNUAL REPORT 43 BOARD OF DIRECTORS Anthony W. Bour President & Chief Executive Officer Showplace Wood Products, Inc. Sioux Falls, SD Director since 1995 David A. Christensen Former President & Chief Executive Officer Raven Industries, Inc. Sioux Falls, SD Director since 1971 Thomas S. Everist Chair-elect Raven Industries, Inc. President The Everist Company Sioux Falls, SD Director since 1996 Mark E. Griffin President & Chief Executive Officer Lewis Drugs, Inc. Sioux Falls, SD Director since 1987 Conrad J. Hoigaard Chairman of the Board Raven Industries, Inc. Chairman of the Board Hoigaard’s Inc. Minneapolis, MN Director since 1976 Kevin T. Kirby President Kirby Investment Corporation Sioux Falls, SD Director since 2007 Cynthia H. Milligan Dean College of Business Administration University of Nebraska, Lincoln Lincoln, NE Director since 2001 Ronald M. Moquist President & Chief Executive Officer Raven Industries, Inc. Sioux Falls, SD Director since 1999 Daniel A. Rykhus Executive Vice President Raven Industries, Inc. Sioux Falls, SD Director since 2008 The Raven Board held four regular meetings in fiscal year 2009. In March 2008, it increased the quarterly dividend for the 22nd-consecutive year and approved a special dividend in August. Audit Committee Thomas S. Everist, Chair Anthony W. Bour Kevin T. Kirby 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 findings regarding Raven’s financial reporting process, related internal and disclosure controls and compliance with applicable standards. Personnel and Compensation Committee David A. Christensen, Chair Mark E. Griffin 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. Griffin Conrad J. Hoigaard Kevin T. Kirby 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. Raven Executive Team David R. Bair Division Vice President & General Manager–Electronic Systems Division, Age: 52, Service 10 years Matthew T. Burkhart General Manager–Applied Technology Division, Age: 33, Service 1 year James D. Groninger Thomas Iacarella Division Vice President & General Manager–Engineered Films Division, Age: 50, Service 22 years Vice President & Chief Financial Officer, Age: 55, Service 17 years Ronald M. Moquist President & Chief Executive Officer, Age: 63, Service 33 years Barbara K. Ohme Daniel A. Rykhus Mark L. West Vice President–Administration, Age: 61, Service 21 years Executive Vice President, Age: 44, Service 19 years President–Aerostar International, Inc., Age: 55, Service 27 years 44 RAVEN 2009 ANNUAL REPORT 58585_Financials.indd 44 3/27/09 6:29:51 PM INVESTOR INFORMATION Annual Meeting May 21, 2009, 9:00 a.m. Ramkota Hotel and Conference Center 3200 W. Maple Avenue Sioux Falls, SD Dividend Reinvestment Plan Raven Industries, Inc. sponsors a Dividend Reinvestment Plan so shareholders can purchase additional Raven common stock without paying 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 to our Investor Relations Department. Dividend Policy Our policy is to return a substantial portion of earnings to shareholders through regular dividends. Each year our board of directors reviews Raven’s dividend and will increase it when the new level is sustainable. Fiscal 2009 represented the 22nd- consecutive year we raised our annual dividend. Raven Web Site www.ravenind.com Stock Quotations Listed on the Nasdaq NGS Stock Market—RAVN Total Return Index Base Year = 100 250 200 150 100 50 0 Jan 2004 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 ﬁscal year ended January 31, 2009, which has been ﬁled with the Securities and Exchange Commission, is available free of charge. Afﬁrmative Action Plan Raven Industries, Inc. and Aerostar International, Inc. are Equal Employment Opportunity Employers with approved afﬁrmative action plans. Inquir esi Raven Industries, Inc. Attention: Investor Relations P.O. Box 5107 Sioux Falls, SD 57117-5107 Phone: 605-336-2750 Providing a Positive Return If an investor purchased $100 of Raven stock on January 31, 2004, held it for the next ﬁve years and reinvested the dividends, its value would have increased to $178.47. This 12% cumulative growth rate represents a gain compared with the S&P 1500 Industrial Index’s $96.77 and the Russell 2000’s $81.48. Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Raven Industries Inc SP1500 Industrial Machinery Russell 2000 Index 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 This annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans” and similar expressions are intended to identify forward-looking statements. The company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although management believes that the expectations reﬂected in forward-looking statements are based on reasonable assumptions, there is no assurance these assumptions are correct or that these expectations will be achieved. Assumptions involve important risks and uncertainties that could signiﬁcantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions and commodity prices, which could affect sales and proﬁtability in some of the company’s primary markets, such as agriculture, construction, and oil and gas well drilling; or changes in competition, raw material availability, technology or relationships with the company’s largest customers—any of which could adversely affect any of the company’s product lines, as well as other risks described in Raven’s 10-K under Item 1A. This list is not exhaustive, and the company does not have an obligation to revise any forward-looking statements to reﬂect events or circumstances after the date these statements are made. RAVEN Raven Industries P.O. Box 5107 Sioux Falls, SD 57117-5107 www.ravenind.com 58585_Cover_u3.indd 1 4/3/09 2:54:57 AM

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