Raven Industries Inc.
Annual Report 2011

Plain-text annual report

InnovatIon & Strong CompetItIve DrIve an n ual r eport 2011 rave n I n DuStr I e S po B ox 51 07 SIoux Fa llS, SD 57 1 17 -5 1 07 ww w.rave n I n D.Com InnovatIon In serving our key markets of precision agriculture, surveillance and barrier films, we are helping to solve some of our world’s most important challenges in the areas of hunger, safety, peace and stability. at the core of our continued success is innovation backed by a strong competitive drive. In fiscal 2011, we enjoyed broad-based revenue gains and our profitability improved despite significantly higher spending for new capabilities and product development that will support long-term growth. with an aggressive growth agenda and a strong capital base, we are on course to realize even greater potential. the following pages of this report show how raven will build on its successes in fiscal 2011 by following a path of investing in new products, new applications, acquisitions and capacity expansion. InveStor InFormatIon Annual Meeting may 24, 2011, 9:00 a.m. CDt 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 2011 was the 24th- consecutive year we raised our annual dividend. Raven Website www.ravenind.com Independent Registered Public Accounting Firm pricewaterhouseCoopers llp minneapolis, mn Stock Quotations listed on the nasdaq ngS Stock market – ravn Stock Transfer Agent & Registrar wells Fargo Bank, n.a. 161 n. Concord exchange p.o. Box 64854 South St. paul, mn 55164-0854 phone: 800-468-9716 website: www.shareowneronline.com Form 10-K raven Industries, Inc.’s Form 10-K for the fiscal year ended January 31, 2011, which has been filed with the Securities and exchange Commission, is available free of charge on the company’s website, or upon written request to the Investor relations Department. Inquiries mail to: Contact: raven Industries, Inc. Investor relations p.o. Box 5107 Sioux Falls, SD 57117-5107 phone: 605-336-2750 e-mail: irinfo@ravenind.com Affirmative Action Plan raven Industries, Inc. and aerostar International, Inc. are equal employment opportunity employers with approved affirmative action plans. InSIDe thIS report letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 raven at a glance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 operations review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 executive team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 10-K table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10K-2 management’s Discussion and analysis . . . . . . . . . . . . . . . . 10K-14 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10K-26 Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inside back cover . m o c m m o c t i l l i f . w w w s n o i t a c i n u m m o C t i l l i F y b d e 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 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 the company’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. Financial highlights For the years ended January 31, 2011 2010 change (Dollars in thousands, except per-share data) Operations net sales Operating income net income cash from operating activities Depreciation and amortization Per Share net income—diluted cash dividends Book value Performance Operating income margin Return on net sales Return on average assets Return on beginning shareholders’ equity $314,708 60,203 40,537 $ 42,085 7,631 $237,782 43,220 28,574 $ 47,643 7,108 $2.24 0.64(a) 7.81 19.1% 12.9% 22.6% 30.4% $1.58 0.55 7.38 18.2% 12.0% 18.2% 25.2% Other Information shares and stock units outstanding, year end (in thousands) average number of employees 18,089 1,036 18,051 930 (a) Excludes a special dividend of $1.25 that was paid during the third quarter of fiscal 2011. 32.4% 39.3% 41.9% -11.7% 7.4% 41.8% 16.4% 5.8% 4.9% 7.5% 24.2% 20.6% 0.2% 11.4% Net Sales (Dollars in millions) 234.0 217.5 204.5 314.7 279.9 237.8 Earnings Per Share (Diluted, in dollars) 2.24 Regular Dividends Per Share (Dollars) 0.64 1.70 1.58 1.53 1.39 1.32 0.55 0.52 0.44 0.36 0.28 ’06 ’07 ’08 ’09 ’10 ’11 ’06 ’07 ’08 ’09 ’10 ’11 ’06 ’07 ’08 ’09 ’10 ’11 sales in fiscal 2011 reached a record $314.7 million, an increase of 32 percent over the prior year. growth was broad-based across Raven’s markets of precision agriculture, surveillance systems and barrier films. Raven achieved a new record of $2.24 per share, an increase of 42 percent over the prior year. Earnings grew faster than sales due to growth in higher margin businesses and higher operating rates. strong cash flow supports continued growth in quarterly dividends. in March 2011, Raven became one of only 44 U.s. companies that have increased their dividend every year for the past 25 years. 2011 An n uAl R epoRt 1 314.700012 269.742868 224.785723 179.828578 134.871434 89.914289 44.957145 0.000000 2.240 1.792 1.344 0.896 0.448 0.000 0.64 0.56 0.48 0.40 0.32 0.24 0.16 0.08 0.00 ’06 ’07 ’08 ’09 ’10 ’11 ’06 ’07 ’08 ’09 ’10 ’11 ’06 ’07 ’08 ’09 ’10 ’11 tO OUR shaREhOlDERs, cUstOMERs anD EMplOyEEs: This past year at Raven was another one for the record books. In fact, it was a phenomenal year when you consider our navigation through a fragile U.S. economy as well as a cautious business climate around the world. What many do not realize is that our profits would have been even higher had we not stepped up our investments in new products, new team members and expanded capacity. Over the last 55 years, Raven has grown into a strong and diversified provider of specialized products and services. One of the common themes providing strength to our business model is our application of technology in developing systems solutions for niche markets. this model is geared to drive high-return sales, and is capital- efficient, meaning we generate more cash than we spend. this formula for success has allowed us to consistently outperform our peers. Our results for the past year include: • sales increased 32% to $315 million. • net income rose 42% to $41 million, while operating margins grew to 19.1% from 18.2%. • Return on sales after tax equaled 12.9%. • Return on equity, one of our key metrics, improved to 30.4%. • the year ended with no debt, and $38.6 million in cash and investments on the balance sheet. • a total of $34.1 million was returned to shareholders as we increased the dividend for the 24th straight year and distributed another special dividend worth $22.5 million. We have now paid a dividend for 38 consecutive years. • We invested $22 million in the future growth of the business units through research and development, capital equipment and facilities. Driving Growth with Greater Intensity We are engaged in tough competition every day. and we aim to win. Our commitment to compete in the areas of service , innovation, peak performance and quality creates a position in each of our niche markets that is both defensible and the basis for future growth. We also know that a successful business cannot grow without continuous investment. today, Raven has reached the critical point where scale and timing provide a window for advancing our market positions. as such, we are increasing our capital commitments where we see the best risk-adjusted returns. While the cost of higher investment may temper bottom line results over the near term, i believe this is a great opportunity for Raven to enter a new period of sustained growth. We know this approach can work at Raven. in fact, it has been the key driver for long-term growth in our applied technology Division (atD). Over the years, we have developed a non-stop cycle of building and managing a portfolio of various growth investments. Daniel A. Rykhus President & Chief Executive Officer 2 RAven I n d ustR I es, I nc . Raven versus the S&P 500 (excluding dividends, fiscal years ending January 31) 1600% 1400% 1200% 1000% 800% 600% 400% 200% 0% -200% RAVN Total Return S&P 500 Total Return ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 Raven has significantly outperformed the s&p 500 index in total shareholder return over the past 10 years. Over that time Raven’s stock price has grown 1,453% versus the s&p’s loss of 6%. Raven versus the S&P 500 (excluding dividends) this included specific activities in: 1600% • new product development 1400% • geographic market expansion 1200% • acquisitions 1000% 800% • partnership and strategic alliances 600% 400% Every year we allocated significant resources to five to ten growth initiatives. 200% the majority of these business 0% development activities had lead times of 12 to 24 months; so our ability to 2002 manage a dynamic pipeline of growth investments was critical. any letup in this strategy would have adversely impacted the downstream potential. 2001 -200% 2003 in hindsight this took courage, a focused vision and a tolerance for risk. now we aim to achieve the same level of intensity across the entire corporation. i want to show you how in each of our divisions we are channeling our success into new opportunities with greater intensity. Applied Technology is on a Path of Global Expansion Our applied technology Division (atD) had a solid year with sales up 16% and operating profits up 21%. growth was led by key new product introductions, demand from the OEMs and continued international growth. the outlook for the U.s. economy is still tenuous; but we believe that farm income will improve further in the coming year. the demand for increased productivity will continue to drive sales of our growing suite of precision ag products and services. importantly, we find ourselves at the early stages of an information revolution in farming operations. 2005 2008 2006 For the coming year, we are focused on the following investment programs: 2011 2004 2010 • concentrating new development 2009 2007 efforts to deliver additional products to our lines of field computers, autosteer systems, planter controls and our slingshot™ agricultural information system. (Fiscal years ending January 31) • Expanding international market presence farther into Eastern Europe and the former soviet Union as well as south america, south africa and asia. • Building out the manufacturing and R&D footprints to provide improved efficiencies and enough capacity to support planned growth over the next five to ten years. Historic Growth in Engineered Films all key market segments delivered revenue growth for the Engineered Films Division (EFD). the energy market was particularly strong in 2010, driven by an increase in domestic land-based drilling activity. Overall division revenue increases of 66% led to an improvement of 92% in operating income. the strong RAVN Total Return sales revenue resulted in high plant S&P 500 Total Return utilization, plus we enjoyed a favorable cost-pricing spread. the net effect was a dramatic increase in our profitability. We recognize that energy drilling is currently the largest driver for demand. however, as industrial and construction activity improves, we can expect a growing contribution from a wider segment of the economy. While the energy market segment was very strong, the division would have posted 25% sales growth even with flat energy market sales. For the coming year, we are focused on the following investment programs: • continued capacity expansion in both our traditional films and higher- value, multi-layer barrier films. • significant improvement in R&D facilities, featuring two new lab lines for product development and state-of-the-art facilities for our visiting strategic partners. • Market development activities within the agriculture, geomembrane and energy markets. teaming up with key suppliers, research organizations and channel partners on various projects. 2011 An n uAl R epoRt 3  For the coming year, we are focused on the following investment programs: in the coming year, we are focused on the following investment programs: • teaming up with our key partners to pursue additional new markets for aerostat systems. • pursuing proprietary products by leveraging intellectual property from other parts of Raven. • Developing an untethered aerostat • considering acquisition platform with station-keeping capability, as well as the ability to carry a payload for surveillance and secure communications through an internally funded research and development initiative. • Expanding our capacity and market presence in various sewn products, including parachutes. • combining our marine navigation systems product lines with our aerostat business group and adding technical staff to pursue integrated port security systems. • Opening an R&D campus that will include a test and demonstration area for large aerostat systems. Electronic Systems Adds to Cash Flow Strength Our Electronic systems Division (EsD) made a positive contribution with sales and operating income up 4% and 10%, respectively, over the prior year. profitability improved despite supply- chain issues that affected both sales and margins. For the year, the mix of products we shipped had a margin profile that is consistent with our expectations for this business and, overall, this unit is generating solid cash flows. EsD is, once again, preparing to shift gears to find the best fit for the right customers using our specialized capabilities in low-volume manufacturing solutions. We are making a long-term commitment to pursue new growth markets and achieve better integration within the Raven manufacturing network. EsD is already an important supplier of key components for our atD products, including cruizer ii™ and Viperpro™. opportunities that would support our corporate-wide product and technology plans. • strengthening our product quality and delivery through ongoing process improvement initiatives. A Strong Balance Sheet Supports Our Vision at the end of the fiscal year, our cash and investment balances were approximately $38.6 million, down from $43.7 million a year ago. this includes the impact of the special dividend of $1.25 per share, or $22.5 million, that was paid out to shareholders during the third quarter. Our operating cash flows for the year were down to $42.1 million from $47.6 million a year earlier due to higher working capital requirements. accounts receivable increased to $40.0 million compared with $34.3 million at January 31, 2010. inventories were $43.7 million, up from $34.5 million in the prior year. as a result of strong growth opportunities, as well as scaling necessities, we are using cash to invest in organic growth more aggressively than in the recent past. however, when we accumulate more cash than we can effectively allocate to profitable growth, we will return it to our shareholders, either as a dividend or in the form of a stock buyback. growing the annual dividend remains an important goal. On March 18, 2011, Raven’s Board of Directors approved the 25th annual increase in the company’s quarterly dividend, to $0.18 per share. Raven is one of only 44 U.s. companies that have increased their dividend every year for the past 25 years. We are honored to be a part of this prestigious club. “ Today, Raven has reached the critical point where scale and timing provide a window for advancing our market positions. While the cost of higher investment may temper bottom line results over the near term, I believe this is a great opportunity for Raven to enter a new period of sustained growth.“ Daniel A. Rykhus President & Chief Executive Officer Aerostar Takes Raven to New Heights aerostar’s incredible year was led by aerostats, which are used in military and other applications for surveillance, communication, reconnaissance and intelligence gathering. aerostats also fueled the segment’s operating income growth of 67%. Raven’s ability to work effectively with the U.s. military and other government agencies has positioned the company for continued growth in fiscal 2012. Raven started as a leader in the design and manufacture of high-altitude research balloons back in 1956. today we have earned a stellar reputation as a proven provider of customized high- quality sewn and sealed products. Our growth strategy for the past two years has focused on tethered aerostats for persistent ground surveillance systems (pgss). We provide not only the helium- filled blimp, but also the mobile trailer equipped with winch, generator, fiber optics and surveillance gear — and the support personnel to train the flight operations teams. 4 RAven I n d ustR I es, I nc . Corporate Services Executives From left to right: Brian E. Meyer Chief Information Officer Mark L. West Chief Technology Officer Thomas Iacarella Vice President & Chief Financial Officer Barbara K. Ohme Vice President—Administration barrier films, we are helping to solve some of our world’s most important challenges in the areas of hunger, safety, peace and stability, and environmental sustainability. through the application, development and acquisition of key technologies, Raven is focused on creating new and innovative solutions every day. this is our time. We know what it takes to succeed in a very competitive world. We also know the great feeling that comes from making a difference through our work. With an aggressive growth agenda and a strong capital base, we are on a path to realize even greater potential as we channel our past success into new opportunities. i look forward to serving all of Raven’s stakeholders today and for years to come and i appreciate your support and confidence in our company. Daniel a. Rykhus President & Chief Executive Officer March 25, 2011 2011 An n uAl R epoRt 5 We Aim to Compete Hard and Win it is said that actions speak louder than words. Raven has significantly outperformed the s&p 500 index in total shareholder return over the past 10 years. Over that time Raven’s stock price has grown 1,453% versus the s&p’s loss of 6%. We also were named by Forbes Magazine as one of the “Best small companies in america” for the fifth consecutive year. On august 20, 2010, i was presented with the privilege to lead Raven as president and cEO and i accepted this opportunity. i have been with the company since 1990 and i am proud of our success over that time. i am even more excited about our future. today, i see an energized organization that embraces competition, innovation and the growth opportunities before it. Our strategy to compete is based on what we call our four Dimensions of competition: 1. Service—providing extraordinary service to our customers, employees and communities. 2. Innovation—Delivering culturally driven leaps forward in technology and process. 3. Peak Performance—Engaging in the personal and professional development of body, mind and spirit. 4. Quality—providing the means by which we continuously improve our customers’ experience. these are the competitive Dimensions on which we will continue to distinguish our company. We are actively engaged in making foundational improvements that will drive us to outstanding performance levels in each of these Dimensions. With this renewed commitment to growth and innovation comes increased accountability. We remain focused on delivering strong financial results, guided by: • Our goal to grow net income by at least 10% annually. • Our targeted above-average gross margins through continuous operating improvements. • Our objective to outperform industry peers in the key metrics of ROa, ROs and ROE. • Our commitment to grow the annual dividend, targeting 20% to 40% of earnings for distribution. During 2010, Ron Moquist retired from Raven industries as our third president and cEO. he also retired from our Board of Directors. Ron was a great mentor to me and a friend. Raven industries will benefit greatly for many years to come from his profound impact on our company. today we remain strongly focused on our mission to be one of america’s best companies. in serving our key markets of precision agriculture, surveillance and RaVEn inDUstRiEs a cOnsistEnt appROach tO cREating ValUE Even though Raven is comprised of four unique operating units, we follow a consistent approach in our pursuit of growth and high returns. We seek profitable expansion in niche markets. the business must have above-average profit margins and strong prospects for growth. We focus on solving the customer’s problem. our model is based on innovation, speed and strong engineering support. We elevate customer service to new levels. support includes field service, training, materials management and value- added distribution. We continuously reinvest in future growth. capital is allocated across new products, new applications, acquisitions and capacity expansion. 6 RAven I n d ustR I es, I nc . oPeRaTIng UnIT PRodUcT/SeRvIce Applied Technology Division (ATD) precision agriculture products and information management tools to reduce costs and improve farm yields. • automated steering • sprayer controls • seed and fertilizer application • gps guidance • Field computers • high-speed internet • integrated information platform Engineered Films Division (EFD) high-quality flexible films for applications in energy, construction, agriculture, water and environmental safety. • Oil and gas pit liners • pond liners • silage covers • Vapor and gas barriers • string-reinforced sheets • Multi-layer films • string-reinforced enclosures Aerostar Division solutions for scientific and military operations, research, surveillance and communications using specialized fabrics and films. Electronic Systems Division (ESD) contract electronic manufacturing services, primarily for low-volume/ high-mix industrial products. • tethered aerostats • Military parachutes • high-altitude scientific research balloons • protective wear • secure communications • persistent surveillance • Marine navigation systems • integrated circuits • secure communications • Fuel actuators • Motorized bed controls • Defense electronics • Box build assembly • Value engineering • test and quality control Division Vice Presidents From left to right: David R. Bair Division Vice President & General Manager Electronic Systems Division Matthew T. Burkhart Division Vice President & General Manager Applied Technology Division James D. Groninger Division Vice President & General Manager Engineered Films Division Lon E. Stroschein Division Vice President & General Manager Aerostar Division FY 2011 ReSUlTS KeY PeRFoRmance goalS ATD earnings grew in FY 2011, with strong demand from domestic and international markets. Operating income was $31 million on net sales of $100 million. • increase sales of high-accuracy automatic steering systems. • Expand the installed base of our slingshot™ information management platform. • accelerate international growth, plus new market entry into china. • increase the percentage of sales from new products. • Expand distribution beyond the custom ag service providers, targeting the farmer. EFD earnings were up in FY 2011, led by the energy and agricultural markets. Operating income was $19 million on net sales of $106 million. • increase available capacity for both commodity-type and specialty films. • introduce new products, with a focus on barrier-type and string-reinforced applications. • Expand engineering and R&D support, including the completion of a new research and development center. • produce more finished products and capture greater value through vertical integration. Aerostar earnings reached record levels in FY 2011, due to successful tethered aerostat and parachute contract ramp-ups. Operating income was $9 million on net sales of $49 million. ESD earnings increased in FY 2011, as supply chain and product mix improved. Operating income was $10 million on net sales of $66 million. • add key personnel in engineering, procurement, manufacturing and sales. • achieve continuous growth in t-11 parachute production. • secure a follow-on contract for pgss and new contracts with foreign military. • put an airship into the stratosphere with payload capabilities for reconnaissance and communications. • pursue prime contractor status for the government services market. • achieve successful start-up on new customer programs. • improve both on-time delivery and schedule visibility for future programs. • improve product quality every step of the way from incoming orders through shipments. • grow sales of proprietary product lines, leveraging our success with atD and aerostar component assemblies. 2011 An n uAl R epoRt 7 Net Sales Net Sales Net Sales neT 100.1 Net Sales SaleS* 86.2 100.1 100.1 86.2 86.2 100.1 86.2 Operating Income Operating Income Operating Income oPeRaTIng Operating Income 31.1 Income* 25.7 31.1 31.1 25.7 25.7 31.1 25.7 ’10 ’10 ’10 ’11 ’11 ’11 ’10 ’10 ’10 ’11 ’11 ’11 ’10 ’11 ’10 ’11 105.8 105.8 105.8 105.8 63.8 63.8 63.8 63.8 ’10 ’11 ’10 ’11 ’10 ’11 19.2 19.2 19.2 10.2 10.2 10.2 19.2 10.2 ’10 ’10 ’10 ’11 ’11 ’11 ’10 ’11 ’10 ’11 48.8 48.8 48.8 27.2 27.2 27.2 48.8 27.2 ’10 ’10 ’10 ’11 ’11 ’11 9.4 9.4 9.4 9.4 5.6 5.6 5.6 5.6 ’10 ’11 ’10 ’11 ’10 ’11 ’10 ’11 ’10 ’11 65.9 65.9 65.9 63.5 63.5 63.5 65.9 63.5 9.9 9.9 9.9 9.9 9.0 9.0 9.0 9.0 ’10 ’11 ’10 ’11 ’10 ’11 * Dollars in millions ’10 ’10 ’10 ’11 ’11 ’11 ’10 ’11 ’10 ’11 100 100 100 80 80 80 100 60 60 60 80 40 40 40 60 20 20 20 40 0 0 0 20 0 106.0 106.0 106.0 84.8 84.8 84.8 106.0 63.6 63.6 63.6 84.8 42.4 42.4 42.4 63.6 21.2 21.2 21.2 42.4 0.0 0.0 0.0 21.2 0.0 49.0 49.0 49.0 39.2 39.2 39.2 49.0 29.4 29.4 29.4 39.2 19.6 19.6 19.6 29.4 9.8 9.8 9.8 19.6 0.0 0.0 0.0 9.8 0.0 66.0 66.0 66.0 52.8 52.8 52.8 66.0 39.6 39.6 39.6 52.8 26.4 26.4 26.4 39.6 13.2 13.2 13.2 26.4 0.0 0.0 0.0 13.2 0.0 31.000000 31.000000 31.000000 26.571429 26.571429 26.571429 22.142857 31.000000 22.142857 22.142857 17.714286 26.571429 17.714286 17.714286 13.285714 22.142857 13.285714 13.285714 8.857143 17.714286 8.857143 8.857143 4.428571 13.285714 4.428571 4.428571 0.000000 8.857143 0.000000 0.000000 4.428571 0.000000 19.000000 19.000000 19.000000 16.285714 16.285714 16.285714 13.571429 19.000000 13.571429 13.571429 10.857143 16.285714 10.857143 10.857143 8.142857 13.571429 8.142857 8.142857 5.428571 10.857143 5.428571 5.428571 2.714286 8.142857 2.714286 2.714286 0.000000 5.428571 0.000000 0.000000 2.714286 0.000000 9.000000 9.000000 9.000000 7.714286 7.714286 7.714286 6.428571 9.000000 6.428571 6.428571 5.142857 7.714286 5.142857 5.142857 3.857143 6.428571 3.857143 3.857143 2.571429 5.142857 2.571429 2.571429 1.285714 3.857143 1.285714 1.285714 0.000000 2.571429 0.000000 0.000000 1.285714 0.000000 10.000000 10.000000 10.000000 8.571429 8.571429 8.571429 7.142857 10.000000 7.142857 7.142857 5.714286 8.571429 5.714286 5.714286 4.285714 7.142857 4.285714 4.285714 2.857143 5.714286 2.857143 2.857143 1.428571 4.285714 1.428571 1.428571 0.000000 2.857143 0.000000 0.000000 1.428571 0.000000 appliED tEchnOlOgy DiVisiOn Since 1978, Raven has played a key role in the growth of precision agriculture – the use of electronic controls, global Positioning System (gPS) products and information management tools designed to reduce operating costs and improve farm yields around the world. FY 2011 in Review Why Customers Choose Raven Expansion of our core product lines success in farming has always and growth in international markets been about using less and getting led to a 16% increase in sales to $100 more. With Raven, you can simply million. We produced solid operating do it better. customers make margins, introduced several new Raven their top choice because: products, and launched our slingshot™ information management platform during a recovering market. 1. We offer a broad precision ag product line backed by solid technical support from our international growth continued to distribution partners, dedicated outpace U.s. growth. south america field staff and knowledgeable produced strong growth results and service team. We invest heavily canada was solidly led by automated in training and other resource steering and slingshot sales. Western tools to ensure our customers Europe continues to be held back by experience the highest level the general economy. however, Eastern of service in our industry. Europe is recovering well. 2. Our OEM partners, the major “ The future of precision ag is all about integration, information and innovation. Our strategy is to provide innovative products to both our OEM and aftermarket partners and an information system that collects, transmits, and stores data, while offering decision support tools in an easy-to-use format. Putting our high-speed infrastructure in place provides the gateway for open communications with a growing Demand from our original equipment ag equipment manufacturers, host of content providers and manufacturer (OEM) partners remained value our innovation and allows end users to improve the strong throughout the year, and leading-edge technology. efficiency of their operations.” especially into last fall. continued We’re also nimble, which helps Matthew T. Burkhart Division Vice President and General Manager strength and growing optimism in the them adapt more quickly to ag market, coupled with attractive tax the changing marketplace. incentives for end users to purchase equipment, drove strong demand for agricultural equipment. We also were successful in adding new OEM partners and expanding our product portfolio with many existing OEMs this past year. 3. Our competitive advantage includes the ability to integrate our technology across multiple machinery platforms. it’s clear that the end user wants an integrated platform in the cab and simplicity of operation for their precision 8 RAven I n d ustR I es, I nc . the latest innovation, slingshot™ (on left), uses wireless connectivity over cell phone networks to give cost-effective secure access to critical operating information. Raven’s OmniRow™ advanced planter control system (on right) allows for variable-rate seeding and automatic section control. ag products. With slingshot we purchases of both new machinery and deliver on our current backlog as well can now deliver the fastest, most productivity enhancements for the as the anticipated demand. reliable wireless connection to the installed equipment base. tractor cab, helping to solve the problem of managing information from the field to the home office. Outlook for FY 2012 We expect continued growth in sales and profits. We look for strong international growth, specifically in south america, Eastern Europe and Russia. china will begin shipping this year through a master distributor, who serves the largest agricultural regions. plus, slingshot will be deployed in several new markets, including Key Performance Goals • increase sales of high-accuracy automatic steering systems. • Expand the installed base of our slingshot information management platform. • accelerate international growth. global growth is spurring the race australia and south africa. to increase our food supply, leading to increased demand for farm commodities. higher pricing will translate into greater financial strength for growers who want to increase their output through challenges include availability and pricing of raw materials and components. however, we have been steadily increasing our capacity to • increase the percentage of sales from new products. • Expand distribution beyond custom ag service providers, targeting the farmer. 2011 An n uAl R epoRt 9 EnginEERED FilMs DiVisiOn Raven is a leading supplier of high-quality flexible films and sheeting for custom applications in energy, industrial, environmental, construction and agricultural markets throughout the United States and abroad. FY 2011 in Review With strong demand across several from the elements during the building and remodeling process. sectors of the economy, Engineered Other achievements included better Films broke the $100 million sales mark equipment performance related to for the first time, reaching $106 million. geomembrane films and growing Record tonnage paced our sales growth, acceptance by engineers and specification and when combined with favorable writers for more of our products. this is a margins, produced significantly improved critical step for generating new orders. operating income. Within our major end markets, the energy sector was the strongest, driven by increased drilling – and demand for our pit liners – in response to higher oil prices. Demand for our agricultural products was also strong as the country enjoyed a good harvest season. For example, Why Customers Choose Raven We combine vertical manufacturing integration and a deep distribution channel to understand and meet customer needs. customers make Raven their top choice because: our FeedFresh™ covers that increase the 1. We provide quality, service and nutritional value of silage, sold very well this season. While the broader construction industry was still down, we were up for the year due to our strong distribution capability. Our material is tested at each processing point to assure quality. We meet time commitments to our customers, providing finished goods when they need them. network. We gained market share in 2. We offer breadth of product since we this segment because of our quality and service. We deal primarily in the commercial segment that includes a wide range of remodeling projects. Our string-reinforced enclosure films offer builders protection utilize three important production technologies—extrusion, conversion and lamination. We can provide more customized solutions for our customers’ needs from a single source. “ This year marks a greater commitment to technical skills and product development capabilities. We now have the facilities to bring in large customers to create and test new applications at a controlled level before producing at high volumes. We also have a significant capacity expansion underway. At Raven we modify standard equipment configurations to produce specialty films. The incremental investment for producing high- value films is a key factor in generating strong profits.” James D. Groninger Division Vice President and General Manager 10 RAve n I n dustR I es, I nc . Raven continues to expand with the recent addition of cast extrusion (on left). Our 300,000 square foot south Dakota operation produces one of the widest ranges of size, material and thickness in the industry. Raven geomembrane sheeting (on right) is used as a rainshed cover to divert rainwater from entering active landfills. 3. We have national distribution that the construction and industrial markets Key Performance Goals gives us a competitive advantage for incremental sales growth as the with the ability to service warehouse economy improves. • increase production capacity for both commodity-type distributors, who in turn supply general contractors and local tradesmen. Every region in the country has its own development focus with different product requirements. Outlook for FY 2012 We expect continued growth in sales and profits. Our growth is expected to be paced by our geomembrane and agricultural end markets. there is also opportunity in We have upgraded some of our films and specialty films. equipment in order to increase our production capacity by about 30%. While some capacity is coming on-line today, we have other lines scheduled for mid-year and the fourth quarter of fiscal 2012. We do not expect significant swings in resin pricing, but we are prepared for them. Raw materials are still a major factor affecting our profitability, but as we move up in volume we gain a more favorable position with our vendors. • Develop and introduce new products. We see great potential for barrier-type and string- reinforced specialty products. • Expand our engineering and R&D support, including the completion of a new research and development center. • produce more finished products and capture greater value through vertical integration. 2011 An n uAl R epoRt 11 aEROstaR DiVisiOn Since 1956, Raven has been a pioneer in aerospace. Today, the aerostar division continues to engineer and build high-altitude research balloons for naSa. Tethered aerostats for global military and commercial applications including communications, intelligence, surveillance and reconnaissance build on our knowledge of lighter-than-air design and materials. FY 2011 in Review strong customer relationship that forms new orders for aerostats and successful execution of our parachute contracts led to a 79% increase in sales the basis for future programs, as well as the creativity and manufacturing technology that support innovation. “ We are focused in two areas: to $49 million. Operating margins 1) lighter-than-air solutions, remained strong despite ongoing which include aerostats, airships investments and project start-up costs. and high-altitude research balloons and 2) parachutes and protective wear. The use of aerostats by the U.S. military for persistent surveillance of war zones is gaining real traction as a cost-effective alternative to unmanned vehicles that require a significant investment in ground infrastructure. In addition, our recent successes have caused us to be more aggressive than ever in developing new business opportunities around the globe that take advantage of our core strengths.” Lon E. Stroschein Division Vice President and General Manager 12 RAve n I n dustR I es, I nc . the majority of our growth last year was driven by tethered aerostats, largely through the Office of the secretary of Defense. Even though we are a relative newcomer to large-scale tethered aerostats, as well as the larger category of communications, intelligence, surveillance and reconnaissance (cisR), we are strongly positioned to serve the specialized needs of the government. aerostar has developed a very strong niche. there is no company in the U.s. that knows more about sewing and sealing specialty fabrics than we do. this includes our t-11 parachute program and protective wear products. Our success has led to more conversations and potential new opportunities in both areas. Our high-altitude airships and research balloons are mainly supplied to nasa. While we do not anticipate much growth over the near term, we enjoy a Why Customers Choose Raven success for our customers is measured by product performance and the service to back it up. customers make Raven their top choice because: 1. We listen and try to give the customer exactly what they want. We’re committed to make products better and safer, which in the surveillance arena allows people in the field to do their job while staying out of harm’s way. plus, our products perform at a price point that has great appeal in this era of scrutiny over value for money spent. 2. We have experience in government contracting. We strive to answer every inquiry as quickly as we can, aiming to stay ahead of what the customer might need next. changes in the world security environment have led to a new focus on wide-area surveillance and strategic monitoring. Raven’s aerostats can be flown over land or over the sea. Examples of payloads include audio and imagery surveillance, communication relay, reconnaissance and atmospheric sampling. 3. We provide service that surpasses While we are working to win Key Performance Goals customer expectations. We want new contracts for persistent ground to earn and keep the reputation as surveillance with the U.s. government, a trusted partner. we are also receiving interest from Outlook for FY 2012 We expect continued growth in sales and profits. other customers for applications such as border patrol. We see further growth potential this year in parachutes, as well as a substantial new opportunity within aerostats will continue to be the protective wear segment. plus, we • Build our business platform in the areas of engineering, procurement, manufacturing and sales. • achieve continuous growth in t-11 parachutes production. • secure a follow-on contract for pgss, as well as new contracts with foreign military customers. a growth driver. We believe that aim to grow our high-altitude platform • put an airship into the stratosphere aerostats will take a greater share of with targeted products being more for an extended period of time surveillance spending. While there are cisR-oriented. limitations to the range we can cover compared with that of fixed-wing unmanned aerial vehicles, we can provide ground reconnaissance value per dollar at a fraction of the cost of competing technologies. with payload capabilities for reconnaissance and communications. • Enter the government services market for sustainment of deployed aerostat systems. 2011 An n uAl R epoRt 13 ElEctROnic systEMs DiVisiOn Raven’s electronic Systems division is a total solution provider of contract electronic manufacturing services primarily for low-volume/high-mix industrial products that stand up to harsh environments with great reliability. FY 2011 in Review Why Customers Choose Raven Our customer base produced sales We focus on a select base of that were up slightly to $66 million. customers with specialized needs. higher profitability resulted from an customers make Raven their top improved product mix. choice because: in avionics, which comprised over one 1. We are very responsive to the needs half of total division sales, we continue of our customers. Our program to provide assemblies to a large managers are responsible for the supplier for major airline programs. Our coordination of all technical and industrial controls business rebounded business aspects associated with for the year, primarily with sales of bed a customer’s program. controls to our major customer. 2. We help customers lower total Our business of supplying cost. We can perform design- subassemblies for Raven’s atD products for-manufacturability analyses, was up significantly versus a year ago. We focus on quality and productivity are currently producing circuit boards for a improvements, and reduce wider range of Raven products, including cycle times. cruizer ii™, Viper pro™ and Envizio™. 3. We offer a full suite of engineering the growth we experienced last services to support new product year was partially offset by a decline in introductions, including rapid secure communications revenue as a prototyping and design evaluation number of projects reached completion. builds. Raven employs customer the addition of a new account in the value teams to ensure attention secure communications market should to every critical aspect of new help mitigate this. program start-ups, as well as measuring ongoing productivity and service levels. “ We understand our customers’ need to improve product performance and reduce total costs. Our division is on a path of continuous improvement. For example, we are further reducing cycle time with process changes and we have recently increased the number of quality engineers. Going forward we are pursuing a broader set of growth opportunities in the areas of secure communications and industrial controls. At the same time, we can become a more valuable partner serving Raven’s manufacturing network.” David R. Bair Division Vice President and General Manager 14 RAve n I n dustR I es, I nc . Raven’s contract electronic manufacturing services include design support, rapid prototyping, material procurement, circuit card and system assembly, in-circuit test, environmental stress screening, repair and warranty, and product distribution. the Electronic systems Division is certified to isO 9001:2008. Outlook for FY 2012 supply chain issues, particularly in Key Performance Goals We expect a stable year in revenues and profits, as well as good cash flow generation, with a decline in avionics to be largely avionics, will remain a key challenge with lead times continuing to stretch out on key components. offset by growth in other programs. Despite the increased investments specifically, we anticipate that two new customer programs will support our sales levels for the coming year. One program is in industrial controls and the other is in secure communications. this year in quality engineering, we look to maintain the current level of operating margins through internal process improvements. • achieve successful start-up on new customer programs. • improve both on-time delivery and schedule visibility for future programs. • improve product quality every step of the way, from incoming orders through shipments. • grow sales of proprietary product lines, leveraging our success with atD and aerostar assemblies. 2011 An n uAl R epoRt 15 BOaRD OF DiREctORs Anthony W. Bour (a)(c) President & Chief Executive Officer showplace Wood products, inc. David A. Christensen (b)(c) Former President & Chief Executive Officer Raven industries, inc. Thomas S. Everist (b)(c) Chairman of the Board Raven Industries, Inc. President the everist company Mark E. Griffin (b)(c) President & Chief Executive Officer lewis Drugs, inc. Conrad J. Hoigaard (b)(c) Chairman of the Board hoigaard’s inc. Kevin T. Kirby (a)(b)(c) President Kirby investment corporation Cynthia H. Milligan (a)(c) Dean Emeritus college of Business administration University of nebraska, lincoln Daniel A. Rykhus President & Chief Executive Officer Raven industries, inc. a = audit committee b = personnel and compensation committee c = governance committee ExEcUtiVE tEaM David R. Bair – Division Vice president & general Manager – Electronic systems Division, age: 54, service 12 years Matthew T. Burkhart – Division Vice president & general Manager – applied technology Division, age: 35, service 3 years James D. Groninger – Division Vice president & general Manager – Engineered Films Division, age: 52, service 24 years Thomas Iacarella – Vice president & chief Financial Officer, age: 57, service 19 years Brian E. Meyer – chief information Officer, age: 48, service 6 months Barbara K. Ohme – Vice president – administration, age: 63, service 23 years Daniel A. Rykhus – president & chief Executive Officer, age: 46, service 21 years Lon E. Stroschein – Vice president & general Manager – aerostar Division, age: 36, service 3 years Mark L. West – chief technology Officer, age: 57, service 29 years 16 RAve n I n dustR I es, I nc . UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2011 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 001-07982 RAVEN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) South Dakota (State of incorporation) 205 E. 6th Street, P.O. Box 5107, Sioux Falls, SD (Address of principal executive offices) 46-0246171 (IRS Employer Identification No.) 57117- 5107 (zip code) Registrant's telephone number including area code (605) 336-2750 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Common Stock, $1 par value Name of Each Exchange on which Registered The NASDAQ Stock Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past ninety days. Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes Yes Yes Yes No No No No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes No The aggregate market value of the registrant's common stock held by non-affiliates at July 31, 2010 was approximately $570,364,695. The aggregate market value was computed by reference to the closing price as reported on the NASDAQ Global Select Market, $35.03, on July 31, 2010, which was as of the last business day of the registrant's most recently completed second fiscal quarter. The number of shares outstanding on March 25, 2011 was 18,075,906. DOCUMENTS INCORPORATED BY REFERENCE The definitive proxy statement relating to the registrant's Annual Meeting of Shareholders, to be held May 24, 2011, is incorporated by reference into Part III to the extent described therein. PART I Item 1. BUSINESS Item 1A. RISK FACTORS Item 1B. UNRESOLVED STAFF COMMENTS Item 2. Item 3. Item 4. PROPERTIES LEGAL PROCEEDINGS REMOVED AND RESERVED PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Quarterly Information (Unaudited) Stock Performance Item 6. SELECTED FINANCIAL DATA Six-year Financial Summary Business Segments Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Equity and Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Item 9A. CONTROLS AND PROCEDURES Item 9B. OTHER INFORMATION PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 11. Item 12. Item 13. EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Item 14 PRINCIPAL ACCOUNTING FEES AND SERVICES PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE INDEX TO EXHIBITS SIGNATURES REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE SCHEDULE II 3 6 9 9 9 9 10 10 11 12 12 13 14 14 17 21 22 23 23 25 25 26 27 28 29 30 31 32 33 46 46 46 47 47 47 47 47 48 49 50 51 52 PART I ITEM 1. BUSINESS Raven Industries, Inc. was incorporated in February 1956 under the laws of the State of South Dakota and began operations later that same year. Raven is an industrial manufacturer providing a variety of products. The company markets its products around the world and has its principal operations in the United States of America. Raven began operations as a manufacturer of high-altitude research balloons before diversifying into the industrial, agricultural, construction and military/aerospace markets. The company employs approximately 1,100 people on active status and is headquartered at 205 E. Sixth Street, Sioux Falls, SD 57104 - telephone (605) 336-2750. The company's Internet address is http://www.ravenind.com and its common stock trades on the NASDAQ Global Select Market under the symbol RAVN. The company has adopted a Code of Conduct applicable to all officers, directors, and employees, which is available on the website. Information on the company's website is not part of this filing. All reports (including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K) and proxy and information statements filed with the Securities and Exchange Commission (SEC) are available through a link from the company's website to the SEC website. All such information is available as soon as reasonably practicable after it has been electronically filed. Filings can also be obtained free of charge by contacting the company, the SEC's Public Reference Room at 100 F Street N.E., Washington, DC 20549, through the SEC's website at http://www.sec.gov, or by calling the SEC at 1-800- SEC-0330. The company has four business segments: Applied Technology Division, Engineered Films Division, Aerostar Division and Electronic Systems Division. Many of the past and present product lines are an extension of technology and production methods developed in the original balloon business. Product lines have been grouped in these segments based on common technologies, production methods and raw materials; however, more than one business segment may serve each of the product markets identified above. Business segment financial information is found on the following pages: 13 17 43 "Business Segments" "Results of Operations – Segment Analysis" "Note 13. Business Segments and Major Customer Information" BUSINESS SEGMENTS Applied Technology Products in this segment are electronic and Global Positioning System (GPS) devices. They are used primarily on agricultural sprayers for precision farming applications. The company has developed products for field location control, chemical injection and automated steering. In the fourth quarter of fiscal 2010, Raven invested in Site-Specific Technology Development Group, Inc., a software company, and purchased the assets of Ranchview, Inc., a developer of GPS signal correction and wireless internet connectivity via cell phone networks. These investments are expected to position Applied Technology with tools to improve grower decision-making along with the hardware to execute these decisions in the field. A field sales force sells the agricultural control products in this segment to original equipment manufacturers (OEMs) and independent third-party distributors. The segment also markets using precision agriculture representatives on location in key geographic areas, including Canada, Europe, Ukraine and Australia. The company's competitive advantage in this segment is product reliability, ease of use, product availability and service after the sale. Engineered Films This segment produces rugged reinforced plastic sheeting for industrial, construction and agricultural applications. 3 The company's sales force sells plastic sheeting to independent third-party distributors in each of the various markets it serves. The company extrudes a significant portion of the film converted for its commercial products and believes it is one of the largest sheeting converters in the United States. Engineered Films believes its ability to both extrude and convert films allows it to provide a more customized solution to customer needs. A number of suppliers of sheeting compete with Raven on both price and product availability. Engineered Films is the company's most capital-intensive business segment, requiring regular investments in new extrusion capacity along with printers and conversion equipment. This segment's capital expenditures were $8.5 million in fiscal 2011, $1.5 million in fiscal 2010 and $3.1 million in fiscal 2009. Aerostar Aerostar sells high-altitude and tethered aerostats for government and commercial research. It produces military parachutes, uniforms and protective wear for U.S. government agencies and as a subcontractor. It also manufactures other sewn and sealed products on a contract basis. Sales are made in response to competitive bid requests. High-altitude research balloons are sold directly to government agencies (usually funded by the National Aeronautics and Space Administration) or commercial users. Aerostar is the only balloon supplier for high-altitude research in the United States. Electronic Systems The company has focused this segment's capabilities in electronics manufacturing services (EMS) for commercial customers with a focus on high-mix, low-volume production. Assemblies manufactured by the Electronic Systems segment include avionics, secure communication, environmental controls and other products where high quality is critical. EMS sales are made in response to competitive bid requests by customers. The level and nature of competition varies with the type of product, but the company frequently competes with a number of EMS manufacturers on any given bid request. The markets in which the company participates are highly competitive, with customers having many suppliers from which to choose. MAJOR CUSTOMER INFORMATION Sales in fiscal 2011, 2010 and 2009 to Goodrich Corporation, a customer of the Electronic Systems segment, accounted for 13%, 16% and 13%, respectively, of consolidated sales. While Electronic Systems expects revenue from this customer to decline, the company does not anticipate any sudden disruptions to this relationship. SEASONAL WORKING CAPITAL REQUIREMENTS Some seasonal demand exists in Applied Technology's agricultural market. Applied Technology builds product in the fall for winter and spring delivery. Certain sales to agricultural customers offer spring payment terms for fall and early winter shipments. The resulting fluctuations in inventory and accounts receivable have required, and may require, seasonal short-term financing. FINANCIAL INSTRUMENTS The principal financial instruments that the company maintains are cash, cash equivalents, short-term investments and accounts receivable. The company manages the interest rate, credit and market risks associated with these accounts through periodic reviews of the carrying value of assets and liabilities and establishment of appropriate allowances in connection with the company policies. The company does not use off-balance sheet financing, except to enter into operating leases. The company uses derivative financial instruments to manage foreign currency risk. The use of these financial instruments has had no material effect on consolidated results of operations, financial condition or cash flows. RAW MATERIALS The company obtains a wide variety of materials from several vendors. Principal materials include numerous electronic components for the Electronic Systems and Applied Technology segments, various plastic resins for the Engineered Films segment and fabrics for the Aerostar segment. The Engineered Films segment has experienced volatile resin prices over the past three years. Price increases could not always be passed on to customers due to weak demand and a competitive pricing environment. The Electronic Systems segment will experience variability in lead times for components as business cycles impact demand. However, predicting future material shortages and the related potential impact on Raven is not possible. 4 PATENTS The company owns a number of patents. However, Raven does not believe that its business, as a whole, is materially dependent on any one patent or related group of patents. It believes the successful manufacture and sale of its products generally depend more upon its technical expertise, speed to market and manufacturing skills. RESEARCH AND DEVELOPMENT The business segments conduct ongoing research and development efforts. Most of the company's research and development expenditures are directed toward new products in the Applied Technology and Aerostar segments. Total company research and development costs are presented on the Consolidated Statements of Income. ENVIRONMENTAL MATTERS Except as described below, the company believes that, in all material respects, it is in compliance with applicable federal, state and local environmental laws and regulations. Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected the company's capital expenditures, earnings or competitive position. In connection with the sale of substantially all of the assets of the company's Glasstite, Inc. subsidiary in fiscal 2000, the company has agreed to assume responsibility for the investigation and remediation of any pre-October 29, 1999 environmental contamination at the company's former Glasstite pickup-truck topper facility in Dunnell, Minnesota as required by the Minnesota Pollution Control Agency (MPCA) or the United States Environmental Protection Agency (EPA). The company and the purchasers of the company's Glasstite subsidiary conducted environmental assessments of the properties. Although these assessments continue to be evaluated by the MPCA on the basis of the data available, there is no reason to believe that any activities that might be required as a result of the findings of the assessments will have a material effect on the company's results of operations, financial position or cash flows. The company had $58,000 accrued at January 31, 2011, its best estimate of probable costs to be incurred related to these matters. BACKLOG As of February 1, 2011, the company's order backlog totaled $76.0 million. Backlog amounts as of February 1, 2010 and 2009 were $74.7 million and $80.4 million, respectively. Because the length of time between order and shipment varies considerably by business segment and customers can change delivery schedules or potentially cancel orders, the company does not believe that backlog, as of any particular date, is necessarily indicative of actual net sales for any future period. EMPLOYEES As of January 31, 2011, the company had 1,112 employees, 1,101 in an active status. Following is a summary of active employees by segment: Electronic Systems - 252; Applied Technology - 313; Engineered Films - 177; Aerostar - 296; Administration - 63. Management believes its employee relations are satisfactory. 5 EXECUTIVE OFFICERS NAME, AGE AND POSITION Daniel A. Rykhus, 46 President and Chief Executive Officer BIOGRAPHICAL DATA Mr. Rykhus became the company's President and Chief Executive Officer in 2010. He joined Raven in 1990 as Director of World Class Manufacturing, was General Manager of the Applied Technology Division from 1998 through 2009, and served as Executive Vice President from 2004 through 2010. Thomas Iacarella, 57 Vice President and Chief Financial Officer Mr. Iacarella joined Raven in 1991 as Corporate Controller and has been the company's Chief Financial Officer, Secretary and Treasurer since 1998. Prior to joining the company, he held positions with Tonka Corporation and the accounting firm now known as Ernst & Young. David R. Bair, 54 Division Vice President and General Manager - Electronic Systems Division Mr. Bair joined Raven in 1999 as Division Vice President and General Manager of the Electronic Systems Division. James D. Groninger, 52 Division Vice President and General Manager - Engineered Films Division Mr. Groninger joined Raven in 1986 and in 1995 became Manager of Glasstite, Inc. He has been Division Vice President and General Manager of the Engineered Films Division since 2004. Barbara K. Ohme, 63 Vice President - Administration Ms. Ohme joined Raven in 1987 as Employment Manager and has been the company's Vice President of Administration since 2004. Matthew T. Burkhart, 35 Division Vice President and General Manager - Applied Technology Division Mr. Burkhart was named Division Vice President and General Manager of the Applied Technology Division on February 1, 2010. He joined Raven in 2008 as Director of Sales and became General Manager - Applied Technology Division on February 1, 2009. Prior to joining the company, he was a Branch Manager for Johnson Controls. Lon E. Stroschein, 36 Division Vice President and General Manager - Aerostar Division Mr. Stroschein was named Vice President and General Manager of the Aerostar Division in October 2010. He joined Raven in 2008 as International Sales Manager for Applied Technology. Prior to joining Raven, he was a bank Vice President and was a member of the executive staff for a U.S. Senator. ITEM 1A. RISK FACTORS FORWARD-LOOKING STATEMENTS Certain statements contained in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans” and similar expressions are intended to identify forward-looking statements. The company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although the company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there is no assurance that such assumptions are correct or that these expectations will be achieved. Such 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 certain of the company's primary markets, such as agriculture and construction and oil and gas well drilling; or changes in competition, 6 raw material availability, technology or relationships with the company's largest customers any of which could adversely impact any of the company's product lines, as well as other risks described below. The foregoing list is not exhaustive and the company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements. RISKS RELATING TO THE COMPANY The company operates in markets that involve significant risks, many of which are beyond the company's control. Based on current information, the company believes that the following identifies the most significant risk factors that could affect its businesses. However, the risks and uncertainties the company faces are not limited to those discussed below. There could be other unknown or unpredictable economic, business, competitive or regulatory factors, including factors that the company currently believes to be immaterial, that could have material adverse effects on the company's financial position, liquidity and results of operations. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. Weather conditions could affect certain of the company's markets such as agriculture and construction. The company's Applied Technology Division is largely dependent on the ability of farmers and agricultural subcontractors known as custom operators to purchase agricultural equipment that includes its products. If such farmers experience adverse weather conditions resulting in poor growing conditions, or experience unfavorable crop prices or expenses, potential buyers may be less likely to purchase agricultural equipment. Accordingly, weather conditions may adversely affect sales in the Applied Technology Division. Weather conditions can also adversely affect sales in the company's Engineered Films Division. To the extent weather conditions curtail construction activity, sales of the segment's plastic sheeting will likely decrease. Price fluctuations in and shortages of raw materials could have a significant impact on the company's ability to sustain and grow earnings. The company's Engineered Films Division (EFD) consumes significant amounts of plastic resin, the costs of which primarily reflect market prices for natural gas. These prices are subject to worldwide supply and demand as well as other factors beyond the control of the company. Although EFD is sometimes able to pass such price increases to its customers, significant variations in the cost of plastic resins can affect the company's operating results from period to period. Unusual supply disruptions, such as caused by a natural disaster, could cause suppliers to invoke “force majeure” clauses in their supply agreements, causing shortages of material. Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served. If the company is not able to fully offset the effects of material availability and costs, financial results could be adversely affected. Electronic components, used by both the Applied Technology Division and Electronic Systems Division, are sometimes in short supply, impacting our ability to meet customer demand. If a supplier of raw materials or components were unable to deliver due to shortage or financial difficulty, any of the company's segments could be adversely affected. Fluctuations in commodity prices can increase our costs and decrease our sales. Agricultural income levels are affected by agricultural commodity prices and input costs. As a result, changes in commodity prices that reduce agricultural income levels could have a negative effect on the ability of growers and their contractors to purchase the company's precision agriculture products manufactured by its Applied Technology Division. Exploration for oil and natural gas fluctuates with their price. Plastic sheeting manufactured and sold by our Engineered Films Division is sold as pit and pond liners to contain water used in the drilling process. Lower prices for oil and natural gas could reduce exploration activities and demand for our products. Plastic sheeting manufacture uses plastic resins which are subject to change in price as the cost of natural gas changes. Accordingly, volatility in oil and natural gas prices may negatively affect our cost of goods sold or cause us to change prices, which could adversely affect our sales and profitability. Failure to develop and market new technologies and products could impact the company's competitive position and have an adverse effect on the company's financial results. The company's operating results in its Applied Technology and to a lesser extent, its Engineered Films and Aerostar segments, are largely dependent on the ability to renew the pipeline of new products and to bring those products to market. This ability could be adversely affected by difficulties or delays in product development such as the inability to identify viable new products, successfully complete research and development, obtain relevant regulatory approvals, obtain intellectual property protection, or 7 gain market acceptance of new products and services. Because of the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products the company is currently developing, or could begin to develop in the future, will achieve substantial commercial success. In addition, sales of the company's new products could replace sales of some of its current products, offsetting the benefit of even a successful product introduction. The company's Electronic Systems Division is dependent on a small number of customers and faces competitive risks. The company's Electronic Systems Division (ESD) is dependent on a small number of customers with the top customer representing over half of ESD sales. Accordingly, the ESD segment is dependent on the continued growth, viability and financial stability of its customers, which consist of original equipment manufacturers of avionics, consumer beds and secure telecommunication equipment. Future sales are dependent on the success of the company's customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to major customers or their products, or the failure of a major customer to pay for components or services, could have an adverse effect on the performance of ESD. Further, ESD competes against many providers of electronics manufacturing services. Certain competitors have substantially greater resources and more geographically diversified international operations than ESD. This segment may also be at a competitive disadvantage with respect to price when compared to manufacturers with lower cost structures, particularly those with more offshore facilities located where labor and other costs are lower. The company also faces competition from the manufacturing operations of current and future customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing to electronics manufacturing services providers. Accordingly, to compete effectively, ESD must continue to provide technologically advanced manufacturing services, maintain strict quality standards, respond flexibly and rapidly to customers' design and schedule changes and deliver products globally on a reliable basis at competitive prices. Customers may cancel their orders, change production quantities or delay production. Start-up costs and inefficiencies related to new or transferred programs can adversely affect operating results and such costs may not be recoverable if such new programs or transferred programs are cancelled. The company's Aerostar segment depends on the U.S. government for a significant portion of its sales, creating uncertainty in the timing of and funding for projected contracts. A significant portion of Aerostar's sales are to the U.S. government or U.S. government agencies as a prime or sub-contractor. Government spending has historically been cyclical. A decrease in U.S. government defense or near-space research spending or changes in spending allocation could result in one or more of the company's programs being reduced, delayed or terminated. Reductions in the company's existing programs, unless offset by other programs and opportunities, could adversely affect its ability to sustain and grow its future sales and earnings. The company's U.S. government sales are funded by the federal budget, which operates on an October-to-September fiscal year. Changes in congressional schedules, negotiations for program funding levels or unforeseen world events can interrupt the funding for a program or contract. Funds for multi-year contracts can be changed in subsequent years in the appropriations process. In addition, the U.S. government has increasingly relied on indefinite delivery, indefinite quantity (IDIQ) contracts and other procurement vehicles that are subject to a competitive bidding and funding process even after the award of the basic contract, adding an additional element of uncertainty to future funding levels. Delays in the funding process or changes in funding can impact the timing of available funds or can lead to changes in program content or termination at the government's convenience. The loss of anticipated funding or the termination of multiple or large programs could have an adverse effect on the company's future sales and earnings. The company derives a portion of its revenues from foreign markets, which subjects the company to risk of changes in government policies and laws or worldwide economic conditions. The company's sales outside the U.S. were $25 million in fiscal 2011. The company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country's or region's economic or political conditions; trade regulations affecting production, pricing and marketing of products; local labor conditions and regulations; reduced protection of intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions on currency exchange activities; burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced sales and reduced profitability associated with such sales. Adverse economic conditions in the major industries the company serves may materially affect segment performance and consolidated results of operations. The company's results of operations are impacted by the market fundamentals of the primary industries served. Significant declines of economic activity in the agricultural, oil and gas exploration, construction, industrial, aerospace/aviation, communication, defense and other major markets served may adversely affect segment performance and consolidated results of operations. 8 ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The company maintains the following properties in connection with its operations, all of which the company owns, unless indicated otherwise: Location Sioux Falls, SD Sulphur Springs, TX Huron, SD St. Louis, MO Madison, SD Austin, TX Stockholm, SK * Leased Square Feet 150,000 131,000 73,000 59,000 35,000 27,000 25,000 24,000 *14,000 23,000 10,000 64,000 24,000 24,000 20,000 *7,000 *7,000 Function Corporate office; electronics manufacturing Plastic sheeting manufacturing Warehouse Plastic sheeting manufacturing and sewing Warehouse and offices Training facility and manufacturing Tethered aerostat and inflatable manufacturing Electronics manufacturing Tethered aerostat inflation and testing Training and product development facility Machine shop Research balloon manufacturing Sewing plant Electronics manufacturing Sewing plant Product development facility Warehouse Business segments All Engineered Films Engineered Films Engineered Films; Aerostar Engineered Films; Aerostar Applied Technology Aerostar Electronic Systems Aerostar Applied Technology Applied Technology Aerostar Aerostar Electronic Systems Aerostar Applied Technology; Aerostar Applied Technology Most of the company's manufacturing plants also serve as distribution centers and contain offices for sales, engineering and manufacturing support staff. The company believes that its properties are suitable and adequate to meet existing production needs. Additionally, the productive capacity in the company's facilities is substantially being utilized. The company plans to build a new Applied Technology manufacturing facility on land purchased in fiscal 2011. In addition, the company owns 6.95 acres of undeveloped land adjacent to the other owned property in Sioux Falls, which is available for expansion. ITEM 3. LEGAL PROCEEDINGS The company is responsible for investigation and remediation of environmental contamination at one of its sold facilities (see “Item 1, Business - Environmental Matters”). In addition, the company is involved as a defendant in lawsuits, claims or disputes arising in the normal course of its business. The potential costs and liability of such claims cannot be determined at this time. Management believes that any liability resulting from these claims will be substantially mitigated by insurance coverage. Accordingly, management does not believe the ultimate outcome of these matters will be significant to its results of operations, financial position or cash flows. ITEM 4. REMOVED AND RESERVED 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Raven's common stock is traded on the NASDAQ Global Select Market under the symbol RAVN. The following table shows quarterly financial results, quarterly high and low closing sales prices per share of Raven's common stock as reported by NASDAQ, and dividends declared for the periods indicated: QUARTERLY INFORMATION (UNAUDITED) (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Net Sales Gross Profit Operating Income Pretax Income Net Income Net Income Per Share(a) Basic Diluted Common Stock Market Price Low High Cash Dividends Per Share FISCAL 2011 First Quarter Second Quarter Third Quarter Fourth Quarter $ 85,030 73,174 85,823 70,681 $ 27,171 20,389 24,887 18,982 $ 19,505 12,623 17,866 10,209 $19,557 12,529 17,883 10,313 $12,945 8,353 11,833 7,406 $ 0.72 0.46 0.65 0.41 $ 0.72 0.46 0.65 0.41 $ 31.79 38.18 42.11 49.59 $ 26.54 28.66 30.00 40.01 $ 0.16 0.16 1.41(b) 0.16 Total Year $ 314,708 $ 91,429 $ 60,203 $60,282 $40,537 $ 2.24 $ 2.24 $ 49.59 $ 26.54 $ 1.89 FISCAL 2010 First Quarter Second Quarter Third Quarter Fourth Quarter $ 65,222 56,586 60,158 55,816 $ 20,428 15,112 16,918 15,394 $ 14,113 9,306 11,119 8,682 $14,114 9,411 11,116 8,681 $ 9,231 6,204 7,293 5,846 $ 0.51 0.34 0.40 0.32 $ 0.51 0.34 0.40 0.32 $ 24.65 31.00 32.43 33.18 $ 15.37 23.99 24.47 24.04 $ 0.13 0.14 0.14 0.14 Total Year $ 237,782 $ 67,852 $ 43,220 $43,322 $28,574 $ 1.58 $ 1.58 $ 33.18 $ 15.37 $ 0.55 FISCAL 2009 First Quarter Second Quarter Third Quarter Fourth Quarter $ 75,166 69,278 75,538 59,931 $ 23,288 17,197 19,564 13,399 $ 16,641 10,312 12,371 7,070 $16,759 10,488 12,548 7,106 $10,882 6,815 8,385 4,688 $ 0.60 0.38 0.47 0.26 $ 0.60 0.38 0.46 0.26 $ 32.80 39.50 47.82 33.24 $ 25.94 29.46 25.79 20.60 $ 0.13 0.13 0.13 1.38(c) Total Year $ 279,913 $ 73,448 $ 46,394 $46,901 $30,770 $ 1.71 $ 1.70 $ 47.82 $ 20.60 $ 1.77 (a) (b) (c) Net income per share is computed discretely by quarter and may not add to the full year. A special dividend of $1.25 per share was paid during the third quarter of fiscal 2011. A special dividend of $1.25 per share was paid during the fourth quarter of fiscal 2009. As of January 31, 2011, the company had approximately 7,500 shareholders of record. A substantially greater number of the company's common stock is held by beneficial holders whose shares are held of record by banks, brokers and other financial institutions. 10 COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG RAVEN INDUSTRIES, S&P 1500 INDUSTRIAL MACHINERY INDEX AND RUSSELL 2000 INDEX Raven continues to outperform its industrial peers and the overall market in shareholder return. Investors who bought $100 of the company's stock on January 31, 2006, held this for five years and reinvested the dividends, have seen its value increase to $174.50. Company / Index 2006 2007 2008 2009 2010 2011 Raven Industries, Inc. $ 100.00 $ 91.05 $ 97.37 $ 74.90 $ 100.24 $ 174.50 S&P 1500 Industrial Machinery Russell 2000 100.00 100.00 114.82 110.51 121.05 99.70 67.90 62.97 92.53 86.78 124.67 114.00 Year Ended January 31 5-Year CAGR(a) 12% 5% 3% (a) compound annual growth rate 11 ITEM 6. SELECTED FINANCIAL DATA SIX-YEAR FINANCIAL SUMMARY (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) OPERATIONS Net sales Gross profit Operating income Income before income taxes Net income Net income % of sales Net income % of beginning equity Cash dividends(a) FINANCIAL POSITION Current assets Current liabilities Working capital Current ratio Property, plant and equipment Total assets Shareholders' equity Long-term debt / total capitalization Inventory turnover (COS / average inventory) CASH FLOWS PROVIDED BY (USED IN) Operating activities Investing activities Financing activities Change in cash COMMON STOCK DATA EPS — basic EPS — diluted Cash dividends per share(a) Book value per share (b) Stock price range during the year High Low Close Shares and stock units outstanding, year-end Number of shareholders, year-end OTHER DATA Price / earnings ratio (c) Average number of employees Sales per employee Backlog For the years ended January 31 2011 2010 2009 2008 2007 2006 $314,708 91,429 60,203 60,282 $ 40,537 $237,782 67,852 43,220 43,322 $ 28,574 $279,913 73,448 46,394 46,901 $ 30,770 $233,957 63,676 41,145 42,224 $ 27,802 $217,529 57,540 38,302 38,835 $ 25,441 $204,528 55,714 37,284 37,494 $ 24,262 12.9% 30.4% $ 34,095 $ 12.0% 25.2% 9,911 11.0% 26.0% $ 31,884 $ 11.9% 28.3% 7,966 $ 11.7% 30.1% 6,507 $ 11.9% 36.7% 5,056 $128,181 34,335 $ 93,846 3.73 $ 41,522 187,760 $141,214 $117,747 25,960 $ 91,787 4.54 $ 33,029 170,309 $133,251 $ 98,073 23,322 $ 74,751 4.21 $ 35,880 144,415 $113,556 $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 $ 71,345 20,050 $ 51,295 3.56 $ 25,602 106,157 $ 84,389 0.0% 5.6 0.0% 5.3 0.0% 5.2 0.0% 5.3 0.0% 5.4 0.0% 5.9 $ 42,085 (11,418) (33,834) (3,121) $ 47,643 (13,396) (9,867) 24,417 $ 39,037 (7,000) (36,969) (5,005) $ 27,151 (4,433) (8,270) 14,489 $ 26,313 (18,664) (10,277) (2,626) $ 21,189 (11,435) (6,946) 2,790 $ $ $ 2.24 2.24 1.89 7.81 49.59 26.54 47.24 18,089 7,456 $ $ $ 1.58 1.58 0.55 7.38 33.18 15.37 28.58 18,051 7,767 $ $ $ 1.71 1.70 1.77 6.30 47.82 20.60 21.81 18,027 8,268 $ $ $ 1.54 1.53 0.44 6.52 45.85 26.20 30.02 18,130 8,700 $ $ $ 1.41 1.39 0.36 5.45 42.70 25.46 28.43 18,044 8,992 $ $ $ 1.34 1.32 0.28 4.67 33.15 16.54 31.60 18,072 9,263 21.1 1,036 304 $ $ 75,972 18.1 930 256 $ $ 74,718 12.8 1,070 262 $ $ 80,361 19.6 930 252 $ $ 66,628 20.5 884 246 $ $ 44,237 23.9 845 242 $ $ 43,619 (a) Includes special dividends of $1.25 per share in fiscal 2011 and 2009. (b) Shareholders' equity divided by common shares and stock units outstanding. (c) Closing stock price divided by EPS — diluted. 12 BUSINESS SEGMENTS (IN THOUSANDS) APPLIED TECHNOLOGY DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization ENGINEERED FILMS DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization AEROSTAR DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization ELECTRONIC SYSTEMS DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization INTERSEGMENT ELIMINATIONS Sales Engineered Films Division Aerostar Electronic Systems Division Operating income Assets REPORTABLE SEGMENTS TOTAL Sales Operating income Assets Capital expenditures Depreciation and amortization CORPORATE & OTHER(a) Operating loss (from admin expenses) Assets Capital expenditures Depreciation and amortization 2011 2010 2009 2008 2007 2006 For the years ended January 31 $ 100,090 31,135 52,669 1,769 2,238 $ 86,217 25,722 51,029 941 1,677 $ 103,098 33,884 48,881 2,674 1,383 $ 64,291 19,102 36,938 1,008 1,125 $ 45,515 10,111 27,629 577 1,142 $ 47,506 13,586 30,047 938 1,085 $ 105,838 19,622 46,519 8,450 3,452 (b) $ 63,783 10,232 35,999 1,460 3,707 $ 89,858 10,919 35,862 3,120 4,303 $ 85,316 17,739 43,688 4,012 4,046 $ 91,082 23,440 41,988 13,266 2,887 $ 82,794 19,907 33,512 7,359 2,436 $ 48,787 9,407 18,140 2,190 757 $ 65,852 9,917 23,385 609 823 $ 27,244 5,634 10,462 332 398 $ 27,186 4,219 8,744 383 444 $ 17,290 1,506 9,941 156 499 $ 14,654 707 8,161 812 375 $ 18,009 2,133 6,837 179 359 $ 63,525 8,979 21,216 290 939 $ 61,983 5,926 26,847 1,399 1,159 $ 67,987 10,365 25,865 1,077 1,237 $ 66,278 10,850 25,175 1,357 1,086 $ 56,219 8,916 20,191 1,612 871 $ (307) (32) (5,520) (94) (186) $ $ (210) (1) (2,776) 60 (92) $ (210) (25) (1,977) (52) (152) $ (533) (16) (378) (100) (100) $ — — — — — — — — — — $ 314,708 69,987 140,527 13,018 7,270 (b) $ 237,782 50,627 118,614 3,023 6,721 $ 279,913 54,896 120,182 7,576 7,289 $ 233,957 48,612 116,332 6,253 6,907 $ 217,529 45,108 102,953 16,012 5,490 $ 204,528 44,542 90,587 10,088 4,751 $ (9,784) 47,233 954 361 $ $ $ (7,407) 51,695 279 387 (8,502) 24,233 425 469 $ $ (7,467) 31,529 382 437 (6,806) 16,811 510 395 (7,258) 15,570 270 400 TOTAL COMPANY $ 314,708 Sales 60,203 Operating income 187,760 Assets 13,972 Capital expenditures 7,631 Depreciation and amortization (a) Assets are principally cash, investments and deferred taxes. (b) Includes a $451 pre-tax gain on disposition of assets. (b) $ 237,782 43,220 170,309 3,302 7,108 $ 279,913 46,394 144,415 8,001 7,758 $ 233,957 41,145 147,861 6,635 7,344 $ 217,529 38,302 119,764 16,522 5,885 $ 204,528 37,284 106,157 10,358 5,151 13 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to enhance overall financial disclosure. It provides management's analysis of the primary 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, 2011 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, Engineered Films, Electronic Systems and Aerostar. Management uses a number of metrics to assess the company's performance: • • • • Consolidated net sales, gross margins, operating income, operating margins, net income and earnings per share Cash flow from operations and shareholder returns Return on sales, assets and equity Segment net sales, gross profit, gross margins, operating income and operating margins The following discussion highlights the consolidated operating results. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section. 14 dollars in thousands, except per-share data 2011 For the years ended January 31 % % change change 2010 2009 Results of Operations Net sales Gross margins (a) Operating income Operating margins (a) Net income Diluted income per share Cash Flow and Payments to Shareholders Cash flow from operating activities Cash dividends Common stock repurchases Cash returned to shareholders Performance Measures Return on net sales(b) Return on average assets(c) Return on beginning equity(d) $ 314,708 32% $ 237,782 (15)% $ 279,913 $ $ $ $ $ $ 29.1% 60,203 19.1% 40,537 2.24 42,085 34,095 — 34,095 12.9% 22.6% 30.4% 39% 42% 42% $ $ $ $ $ $ 28.5% 43,220 18.2% 28,574 1.58 47,643 9,911 — 9,911 12.0% 18.2% 25.2% (7)% (7)% (7)% $ $ $ $ $ $ 26.2% 46,394 16.6% 30,770 1.70 39,037 31,884 5,180 37,064 11.0% 21.1% 26.0% (a) The company's gross and operating margins may not be comparable to industry peers due to variability in the classification of expenses across industries in which the company operates. (b) Net income divided by sales (c) Net income divided by average assets (d) Net income divided by beginning equity Results of Operations - Fiscal 2011 versus Fiscal 2010 Fiscal 2011 was the most profitable year in the company's history as record sales and increased productivity led to record earnings per share. Sales rose 32% to $314.7 million and diluted earnings increased 42% to $2.24 per share as a result of sales growth in Applied Technology (16%), Engineered Films (66%) and Aerostar (79%). Applied Technology benefited from strong U.S. farm fundamentals as commodity prices—corn, soybeans and other feed grains —remained above historical levels. Economic growth in major economies and economic, income and population growth in emerging markets continued to spur increased demand for food and support healthy worldwide agriculture fundamentals. Engineered Films' primary end markets—energy, geomembrane, industrial, agriculture and construction—rebounded from prior year recessionary levels. Aerostar capitalized on strong demand from the U.S. military for persistent ground surveillance systems. Electronic Systems benefited from higher demand for avionics and increased sourcing of assemblies to Applied Technology partially offset by weaker deliveries of circuit boards for secure communication devices. Applied Technology Fiscal 2011 sales of $100.1 million grew $13.9 million (16%) and operating income of $31.1 million rose $5.4 million (21%). The primary drivers of the full-year results were strong sales of application controls (i.e. control systems, flow meters, valves) and steering and guidance products (i.e. assisted-steering, GPS receivers) and the highly successful first quarter launch of Slingshot™—an information platform which improves data collection, transmission, storage and analysis and provides RTK correction of GPS signals for high accuracy steering solutions. Engineered Films Fiscal 2011 sales of $105.8 million increased $42.1 million (66%) and operating income of $19.6 million increased $9.4 million (92%). Economic growth and expectations for continued economic growth—particularly in emerging markets—pushed oil prices to levels adequate to support an increase in drilling activity, which accelerated demand for pit liners. Additionally, sales of FeedFresh™ silage covers grew due to healthy farm conditions and broadened appreciation of the value proposition of this highly 15 engineered film. Sales of construction films (particularly in the fourth quarter) and industrial films rose as business activity rebounded from recessionary levels. Full-year operating margins improved, reflecting improved capacity utilization and productivity gains. Aerostar Fiscal 2011 sales of $48.8 million grew $21.5 million (79%) and operating income of $9.4 million rose $3.8 million (67%). The sales and operating income gains were driven by increased demand for tethered aerostat systems for persistent military surveillance. Full-year operating margins were down slightly year-over-year as margin gains due to tethered aerostat sales and resulting profitability were offset by start-up costs related to the T-11 Army Airborne parachute contract and higher product development and selling expenses to support the tethered aerostats business. Electronic Systems Fiscal 2011 sales of $65.9 million increased $2.3 million (4%) and operating income of $9.9 million grew $0.9 million (10%). Full-year results were positively impacted by avionics sales growth, despite supply chain disruptions, and increased sourcing of assemblies to Applied Technology partially offset by weaker deliveries of circuit boards for secure communication devices. Product mix had a favorable impact on full-year operating margins. Results of Operations - Fiscal 2010 versus Fiscal 2009 The 15% decrease in net sales was the result of year-over-year sales declines in Applied Technology (16%) and Engineered Films (29%). Electronic Systems and Aerostar sales were relatively flat year-over-year. Expectations of lower farm income and economic uncertainty caused growers and custom spray applicators to defer purchases, which negatively affected substantially all of Applied Technology's product categories. The impact of the weak economy on Engineered Films' largest markets resulted in year-over- year declines of energy market sales (40%) and construction market sales (25%). Electronic Systems sales were up 2% year-over- year, reflecting increased deliveries of avionics and secure communication electronics to meet rising demand from government agencies and the aerospace market, which were partially offset by a smaller customer base. Aerostar sales were flat compared with last year, as increased deliveries of MC-6 Army parachutes, aerostats and research balloons were offset by decreased deliveries of protective wear. Applied Technology operating margins contracted year-over-year, reflecting the negative impact of lower sales and operating leverage on profitability. However, disciplined margin management, operational efficiencies and higher productivity brought improved operating margins for Engineered Films, Electronic Systems and Aerostar. Consequently, the 7% year-over-year decrease in operating income was less severe than the 15% drop in sales. Cash Flow and Payments to Shareholders The company continues to generate strong operating cash flows and maintain a strong capital base. In the first quarter of fiscal 2011, the quarterly dividend was raised from 14 cents per share to 16 cents per share, representing the 24th consecutive annual increase in the dividend (excluding special dividends). During fiscal 2011, $34.1 million was returned to shareholders through quarterly dividends totaling $11.5 million, or 64 cents per share, and a special dividend of $22.5 million, or $1.25 per share. The special dividend was paid on September 30, 2010 in response to the company’s strong cash position and commitment to return excess cash to shareholders. During fiscal 2010, $9.9 million was returned to shareholders through quarterly dividends. The quarterly cash dividend increased from 13 cents per share to 14 cents per share beginning in the second quarter. 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. Raven generated a record 12.9% return on sales in fiscal 2011 as the company continues to capitalize on competitive advantages in niche markets. 16 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 the fiscal years ended January 31, dollars in thousands Net sales Gross profit Gross margins Operating income Operating margins 2011 % change $ 100,090 45,106 45.1% $ 31,135 31.1% 16% 19% 21% $ $ 2010 86,217 37,889 43.9% 25,722 29.8% % change (16)% (19)% (24)% $ $ 2009 103,098 46,591 45.2% 33,884 32.9% Fiscal 2011 net sales of $100.1 million increased $13.9 million (16%) and operating income of $31.1 million was up $5.4 million (21%) versus fiscal 2010. Fiscal 2011 fourth quarter net sales of $22.3 million grew $5.0 million (29%) and operating income of $5.9 million rose $1.7 million (42%). Several factors contributed to the strong full-year and fourth quarter comparative results: • • • Market conditions. U.S. farm fundamentals were strong as commodity prices—corn, soybeans and other feed grains— remained above historical levels. In addition, global market conditions were healthy as population and income growth in emerging economies continued to spur increased demand for food. Sales volume and selling prices. Fiscal 2011 sales growth was driven by higher volume and modest selling price increases. The growth in volume reflects solid year-over-year demand for Slingshot™, application controls and guidance and steering products. New product sales. Year-to-date new product sales reflected the success of Slingshot™—an information platform which improves data collection, transmission, storage and analysis and provides RTK correction of GPS signals for high accuracy steering solutions. International sales. Net sales outside the U.S. accounted for 21% of segment sales in fiscal 2011 versus 20% in fiscal 2010. International sales of $21.3 million rose $4.2 million (25%) year-over-year led by strong Slingshot™ demand in Canada. Economic growth and strong farm fundamentals in Argentina and Brazil drove strong overall demand in South America. This growth was partially offset by a decrease in Australian sales due to weak market conditions. Gross Margins. Gross margins of 45.1% in fiscal 2011 rose from 43.9% in fiscal 2010 due to the positive effect of higher sales and strong operating leverage on profitability. Operating expenses. Full-year operating expenses decreased from 14.1% of sales in fiscal 2010 to 14.0% in fiscal 2011. Strong sales and growth opportunities drove a $1.1 million (16%) increase in selling expenses and research and development expenses increased $0.7 million (14%) to support product development and strategic initiatives. • • • Fiscal 2010 net sales of $86.2 million decreased $16.9 million (16%) and operating income of $25.7 million was down $8.2 million (24%) versus fiscal 2009. Lower sales and operating income were due primarily to a decrease in sales volume partially offset by modest selling price increases. A number of factors contributed to the drop in full-year comparative results: • • • • Economic uncertainty. The government's calendar 2009 farm income forecast was significantly lower than 2008 actual levels. Farm production costs declined from prior-year levels; however, they were outpaced by the decline in crop prices. Expectations of lower farm income and economic uncertainty led growers and custom spray applicators to defer purchases. These factors had a negative impact on substantially all of the segment's product categories. New product sales. Fiscal 2010 new product sales decreased from one year earlier due to the highly successful fiscal 2009 launch of innovative field computers. International sales. International sales of $17.1 million fell $1.7 million (9%) year-over-year. Net sales outside the U.S. accounted for 20% of segment sales in fiscal 2010 versus 18% in fiscal 2009. Declines in some markets were partially offset by expansion into regions not previously served. Negative operating leverage. Gross margins of 43.9% in fiscal 2010 fell from 45.2% in fiscal 2009 reflecting the negative 17 • impact of falling sales and operating leverage on profitability. Operating expenses. Full-year operating expenses increased to 14.1% of sales in fiscal 2010 from 12.3% in fiscal 2009. Selling expenses decreased $0.5 million (7%) and lagged the drop in sales. Research and development expenses were flat year-over-year. Engineered Films Engineered Films produces rugged reinforced plastic sheeting for industrial, construction, geomembrane and agricultural applications. Financial highlights for the fiscal years ended January 31, 2011 $ 105,838 22,708 dollars in thousands Net sales Gross profit Gross margins Operating income Operating margins (a) Includes a $451 pre-tax gain on the disposition of assets. 21.5% 19,622 18.5% $ (a) % change 66% 75% 92% $ $ 2010 63,783 13,013 20.4% 10,232 16.0% % change (29)% (10)% (6)% $ $ 2009 89,858 14,502 16.1% 10,919 12.2% Fiscal 2011 net sales of $105.8 million increased $42.1 million (66%) while operating income of $19.6 million was up $9.4 million (92%) versus fiscal 2010. Fiscal 2011 fourth quarter net sales of $24.3 million grew $7.6 million (45%) and operating income of $3.0 million rose $0.6 million (27%). Several factors contributed to the strong full-year and fourth quarter comparative results: • • • • Improved market conditions. Business activity and confidence rose as credit markets improved and asset values stabilized. Crude oil prices rose to levels adequate to support increased drilling activity and strengthened energy market demand for pit liners. Similarly, as credit began flowing and economic uncertainty diminished, the construction and agriculture markets rose from recessionary levels. Sales volume and selling prices. Input cost increases drove a 13% increase in selling prices. Sales volume, as measured by pounds shipped, increased over 50%, as Engineered Films’ largest markets—energy and construction—rebounded from prior year depressed levels. Recovery of crude oil prices from their lows in early calendar 2009 drove additional oil and gas drilling activity and increased demand for pit liners as sales to the energy market more than doubled. Sales of industrial and construction films rose double digits. Deliveries of agriculture films rose more than 60%. Sales of FeedFresh™ silage covers gained traction due to healthy farm conditions and broadened appreciation of the value-added benefits of this highly engineered film. Grain cover sales improved year-over-year due to strong yields and a short harvest cycle. Capacity Utilization. Full-year operating margins expanded from 16.0% to 18.5% as a result of improved capacity utilization. Fourth quarter profit margins fell from 14.4% to 12.5% as a result of less favorable leverage and increased purchases of outside materials due to capacity constraints caused by planned maintenance. Operating expenses. Full-year operating expenses were 3.3% of sales in fiscal 2011 versus 4.4% in fiscal 2010. The increase in selling expenses of $0.7 million (30%) lagged the 66% increase in sales. Research and development expenses were flat year-over-year. Fiscal 2010 net sales of $63.8 million decreased $26.1 million (29%) while operating income of $10.2 million was off $0.7 million (6%) versus fiscal 2009. Lower sales and operating income reflected falling sales volume and selling prices. The year-over-year change was driven primarily by the following factors: • • Depressed markets. Dysfunctional credit markets and plunging asset values resulted in weak economic activity. Energy prices plunged as a result of the reduction in economic activity, 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. Agricultural commodity prices also fell sharply, resulting in a softening of the agricultural market. The impact of the recession was felt across all of the division's markets, with sales to the two largest markets—energy and construction —decreasing approximately 40% and 25%, respectively. Sales volume and selling prices. Selling prices decreased approximately 16% and sales volume as measured by pounds 18 • shipped fell 17% year-over-year. These negative trends reflected market disruptions, competitive pricing pressures stemming from excess industry capacity and lower resin costs due to relatively low natural gas prices. Cost containment. Management responded quickly and decisively to the freefall in business activity experienced in the fourth quarter of fiscal 2009. The necessary steps were taken to align the division with the weak business environment, by tightly managing expenses and decreasing headcount. • Margin preservation. Poor economic conditions, volatile material costs and competitive pricing pressures continued to squeeze margins. However, the impact of these factors was more than offset by opportune purchases of prime grade resin and cost containments. Consequently, gross margins increased from 16.1% to 20.4%. Operating expenses. Full-year operating expenses increased to 4.4% of sales in fiscal 2010 from 4.0% in fiscal 2009. Research and development expenses were flat year-over-year. Selling expenses of $2.4 million decreased 25% year- over-year through reductions in personnel and promotional expenses. However, this lagged the 29% drop in sales. • Aerostar Aerostar manufactures military parachutes, protective wear, custom-shaped inflatable products and high-altitude and tethered aerostats for government and commercial research. Financial highlights for the fiscal years ended January 31, dollars in thousands Net sales Gross profit Gross margins Operating income Operating margins $ $ 2011 48,787 12,475 25.6% 9,407 19.3% % change 79% 88% 67% $ $ 2010 27,244 6,632 24.3% 5,634 20.7% % change 0% 28% 34% $ $ 2009 27,186 5,189 19.1% 4,219 15.5% Fiscal 2011 net sales of $48.8 million increased $21.5 million (79%) and operating income of $9.4 million grew $3.8 million (67.0%) over fiscal 2010. Fiscal 2011 fourth quarter net sales of $12.0 million increased $3.0 million (34%) and operating income of $2.3 million increased $0.2 million (10%) versus fiscal 2010. Fiscal 2011 full-year and fourth quarter comparative results were primarily attributable to the following: • • Tethered aerostats. Aerostar capitalized on strong demand from the U.S. military for persistent ground surveillance systems to be deployed in Afghanistan. This segment provides the helium filled blimp, along with the fiber optics and deployment system. The blimp is then equipped with surveillance equipment and flown on a tether at over 1,500 feet above ground level to enable persistent surveillance of a wide area. Volatility in aerostat deliveries. Sequentially, fiscal 2011 quarterly sales of aerostats varied materially ($8.2 million in the first quarter; $3.2 million in the second quarter; $7.4 million in the third quarter and $3.6 million in the fourth quarter) as design changes and funding shifts have impacted the timing of deliveries. • Military parachutes. Fiscal 2011 full-year and fourth quarter parachute revenue increased over 20% as the T-11 parachutes • • ramped to full production and deliveries under the T-11 spares contract began. Gross Margins. Full-year gross margins improved year-over-year. The negative effect of T-11 parachute start-up costs in the first half of the year and increased overhead was partially offset by a more favorable product mix as the relative contribution of tethered aerostats to total sales grew. Operating expenses. Operating expenses of $3.1 million or 6.3% of sales increased $2.1 million from $1.0 million or 3.7% of sales as a result of higher selling expenses and significant investments in research and development primarily to support aerostat development. Fiscal 2010 net sales of $27.2 million were flat and operating income of $5.6 million grew $1.4 million (34%) over fiscal 2009. Fiscal 2010 results were driven by the following: • Sales volumes. Flat year-over-year sales reflected increased deliveries of MC-6 Army parachutes, aerostats and research balloons, offset by decreased deliveries of protective wear due to the completion of a large contract in January 2009. • Margin expansion. The improvement in gross and operating margins came from increased parachute manufacturing efficiencies. Final production runs and deliveries were made at the end of fiscal 2010 on the MC-6 parachute contract. Fiscal 2010 was the most profitable year for the program, primarily due to the higher efficiency level attained. 19 • Operating expenses. Operating expenses were relatively flat year-over-year. Electronic Systems Electronic Systems is a total-solutions provider of electronics manufacturing services, primarily to North American original equipment manufacturers. Financial highlights for the fiscal years ended January 31, dollars in thousands 2011 % change 2010 % change 2009 Net sales Gross profit Gross margins Operating income Operating margins $ 65,852 11,234 17.1% 4% 10% $ 63,525 10,258 16.1% 2% 42% $ 61,983 7,218 11.6% $ 9,917 10% $ 8,979 52% $ 5,926 15.1% 14.1% 9.6% Fiscal 2011 net sales of $65.9 million increased $2.3 million (4%) and operating income of $9.9 million grew $0.9 million (10%) from fiscal 2010. Fiscal 2011 fourth quarter net sales of $13.7 million were flat and operating income of $1.7 million decreased $0.3 million (14%) from fourth quarter fiscal 2010. The following factors affected fiscal 2011 full-year results: • • • Sales volume. Fiscal 2011 revenue was positively impacted by avionics growth and increased sourcing of assemblies to Applied Technology partially offset by weaker deliveries of circuit boards for secure communication devices. Profit margins. Product mix had a favorable impact on full-year operating margins. Fourth quarter operating margins of 12.2% were down from 14.2% in the fourth quarter of fiscal 2010 due to a less favorable mix and increased overhead costs to compensate for supply chain weakness on flat sales volume. Operating expenses. Fiscal 2011 operating expenses were relatively unchanged from fiscal 2010 levels. Fiscal 2010 net sales of $63.5 million increased $1.5 million (2%) and operating income of $9.0 million grew $3.1 million (52%) from fiscal 2009. Fiscal 2010 full-year comparative results reflected the following: • Growth from existing customers. The rise in sales was attributable to higher deliveries of avionics and secure communication electronics to meet increased demand from government agencies and the aerospace market, partially offset by a smaller customer base. • Margin expansion. Gross margins expanded as a result of positive operating leverage produced through increased sales to existing customers, favorable product mix and cost controls—such as headcount reduction and facility consolidation. Operating expenses. Operating expenses were relatively flat year over year. • Corporate Expenses (administrative expenses, income taxes and interest income and other, net) dollars in thousands Administrative expenses Administrative expenses as a % of sales Interest income and other, net Effective tax rate For the years ended January 31 $ $ 2011 9,784 3.1% 79 32.8% $ $ 2010 7,407 3.1% 102 34.0% $ $ 2009 8,502 3.0% 507 34.4% Administrative expenses increased 32% in fiscal 2011 compared with fiscal 2010, as a result of higher compensation expense due to increased headcount and higher incentive compensation. Administrative expenses declined 13% in fiscal 2010 compared with fiscal 2009, driven by headcount reductions and lower incentive compensation and legal expenses. “Interest income and other, net" consists mainly of interest income, bank fees and foreign currency transaction gain or loss. The 20 year-over-year variability is attributable primarily to a decrease in interest income due to lower interest rates and fluctuations in exchange rates. The fiscal 2011 effective tax rate was favorably affected by the U.S. federal tax deduction from income attributable to manufacturing activities. Fourth quarter fiscal 2011 tax expense was favorably impacted by renewal of the U.S. research and development tax credit in December 2010. The rate is expected to increase slightly in fiscal 2012. OUTLOOK Management believes double digit sales and profit growth for fiscal 2012 is achievable, building on strong fiscal 2011 results. Fiscal 2010 cash preservation and cost containment strategies enabled management to reinvest across the company and return $34 million to shareholders in fiscal 2011 while maintaining substantial liquidity and a strong capital base. In fiscal 2012, management plans to accelerate the rate of organic investment through increased research and development, and capital investments. Management also continues to look for complementary acquisitions to augment existing products and markets, while supporting growth in quarterly dividends. In the near-term, profit margins could be pressured but these investments are intended to position the company for long-term growth. Applied Technology Management will continue to make significant investments in product development and global expansion and is committed to building on prior year investments in SST and Ranchview. The development of an industry-leading decision-support system helps position Applied Technology as a premier total precision solutions provider (GPS steering devices, planting and spraying controls, data collection, transmission, storage and analysis). Applied Technology's strategy of integrate, inform and innovate along with strong brand recognition, ease of use, product localization and industry leading service creates strong growth opportunities. Worldwide agriculture conditions are expected to remain healthy for this segment, with rising global demand for food, heightened environmental concerns and broadening recognition of Raven's suite of productivity tools as a cost-effective investment supporting management's outlook for profit growth that could approach the 20% range. Engineered Films The addition of new extrusion equipment in the second half of fiscal 2012 is expected to increase annual capacity by approximately 25%. This equipment will improve sales opportunities by adding both new capacity and capabilities to this segment. Additional depreciation and new product introduction costs will partially offset the positive impact of the higher pounds produced until new extrusion capacity is fully utilized. This ramp-up period has typically taken 2-3 years, depending on market conditions. In addition, profit margins are highly dependent on the ratio of selling prices to input costs. The selling price of blown films is largely driven by competitive pricing pressure, capacity utilization and market dynamics—supply and demand. Plastic resin—a derivative of natural gas and oil—is the primary component of extruded films. Management anticipates continuing demand for pit liners for oil exploration, geomembrane products for lining and capping landfills, water canals and reservoirs and to build on its success with highly engineered films such as FeedFresh™ silage covers and VaporBlock Plus™ radon barriers. Double digit growth is possible, if management is able to bring the new equipment on line and exploit its new capabilities in the second half of the year. Aerostar Management projects strong sales growth for the first half of the coming year. Tethered aerostat systems deployed in Afghanistan have promoted the safety of U.S. troops by successfully providing continuous wide-area surveillance of insurgents. Management is optimistic about new opportunities in tethered aerostats and anticipates follow-on opportunities to provide cost-effective persistent surveillance for the military. As in this past year, deliveries could vary significantly by quarter as follow-on orders are dependent on the government funding process. Management also sees opportunities for growth under existing government contracts for military parachutes and new contracts for protective wear. The engineering knowledge and manufacturing technology gained from these relationships along with expertise in sewing and sealing specialty fabrics will help solidify Aerostar's competitive advantage. Additional investment in product and market development is expected to partially offset the impact of sales growth, but profit growth in the 15-20% range is possible. Electronic Systems Management looks at Electronic Systems as a complementary business to its growth divisions: Engineered Films, Aerostar and especially Applied Technology. This business carries technical expertise that support the efforts of its sister divisions and provides electronic manufacturing services to low-volume high-mix customers that require high levels of service and engineering support. Management anticipates adding an additional customer in fiscal 2012, but believes this growth will be more than offset by lower avionics sales. The mid- to long-term growth strategy is predicated on the development of proprietary products, expansion of the customer base and continued in-sourcing of assemblies for Raven's other divisions. Electronic Systems Division results for fiscal 21 2012 are expected to be roughly flat or somewhat lower than in fiscal 2011. LIQUIDITY AND CAPITAL RESOURCES The company's balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been Raven's primary source of liquidity. Management expects that current cash, combined with the generation of positive operating cash flows, will be sufficient to fund the company's operating, investing and financing activities. Raven's cash needs are seasonal, with working capital demands strongest in the first quarter. As a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in working capital. Cash, cash equivalents and short-term investments totaled $38.6 million at January 31, 2011, a $5.1 million decrease from $43.7 million on the same date in 2010. In September 2010, the company paid a special cash dividend of $22.5 million. Raven has an uncollateralized credit agreement that provides an $8.0 million line of credit, with a balance of zero at January 31, 2011. The line of credit is reduced by outstanding letters of credit totaling $1.3 million as of January 31, 2011. The credit line, which matures on July 1, 2011, is expected to be renewed during fiscal 2012. Operating Activities Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, services, employee compensation and income taxes. Management evaluates working capital levels through the computation of average days sales outstanding and inventory turnover. Average days sales outstanding is a measure of the company's efficiency in enforcing its credit policy. The inventory turnover ratio is a metric used to evaluate the effectiveness of inventory management, with further consideration given to balancing the disadvantages of excess inventory with the risk of delayed customer deliveries. Cash provided by operating activities was $42.1 million in fiscal 2011 compared with $47.6 million in fiscal 2010. The decrease in operating cash flows is the result of increased working capital to support growth, partially offset by higher company earnings. Inventory consumed $9.2 million of cash in fiscal 2011 versus cash generated of $1.6 million in fiscal 2010 reflecting higher raw material costs, higher forecasted demand, delayed deliveries at Electronic Systems and purchases of plastic resins at Engineered Films in anticipation of price increases. Similarly, accounts receivable consumed cash of $5.5 million in fiscal 2011 versus cash generated of $6.3 million in fiscal 2010, reflecting higher receivables associated with sales growth—particularly sales of engineered films and tethered aerostats. The company continues to focus on disciplined inventory management (inventory turnover of 5.6X in fiscal 2011 versus 5.3X in fiscal 2010) and improved cash collections (average days sales outstanding of 48 days in fiscal 2011 versus 52 days in fiscal 2010). Year-over-year variability in accounts payable and accrued liabilities generated $7.1 million in cash, as compared with cash inflows of $2.4 million in fiscal 2010. This reflected an increase in accounts payable commensurate with the rise in inventory and higher incentive compensation accruals associated with strong profits. Bad debt expense was not material for both fiscal 2011 and 2010. In fiscal 2010, reductions in inventory and accounts receivable generated $7.9 million in cash versus cash consumed of $4.2 million in fiscal 2009. Lower business levels, disciplined inventory management (inventory turnover of 5.3X in fiscal 2010 versus 5.2X in fiscal 2009) and improved cash collections (average days sales outstanding of 52 days in fiscal 2010 versus 54 days in fiscal 2009) resulted in strong operating cash flows. Additionally, year-over-year variability in accounts payable generated $2.9 million in cash, as compared with $1.0 million in fiscal 2009, due to more favorable payment terms. This favorable cash impact was partially offset by a decrease in accrued liabilities, which reflected lower compensation accruals and the acceleration of a $1.1 million cash contribution to the employee 401(k) plan, due to a change in the plan design. Fiscal 2010 bad debt recoveries of $0.2 million compared favorably to prior-year expense of $0.6 million, reflecting lower sales and more stable economic conditions— particularly related to the company's international exposure. Investing Activities Cash used in investing activities totaled $11.4 million in fiscal 2011, $13.4 million in fiscal 2010 and $7.0 million in fiscal 2009. The fiscal 2011 decrease from the prior year reflects a $10.7 million increase in capital expenditures offset by a $5.0 million decrease in net purchases of short-term investments, proceeds of $0.9 million on the disposition of an Engineered Films warehouse and $6.5 million of cash outlays in fiscal 2010 for the SST and Ranchview investments. The increase in cash invested between fiscal 2010 and 2009 was the result of a $4.5 million increase in net purchases of short- term investments and $6.5 million of cash outlays for the SST and Ranchview investments, partially offset by a $4.7 million reduction in capital expenditures. 22 Management anticipates record capital spending in fiscal 2012—in the $30 million range —as management sees opportunities to earn attractive returns on invested capital through organic investments. In addition, management will evaluate strategic acquisitions that result in expanded capabilities and solidify competitive advantages. Financing Activities Cash used in financing activities is primarily for dividend payments and repurchases of common stock. Financing activities consumed cash of $33.8 million in fiscal 2011 compared with $9.9 million in fiscal 2010 and $37.0 million in fiscal 2009. In fiscal 2011, the company paid quarterly dividends totaling $11.5 million, or 64 cents per share, and paid a special dividend of $22.5 million, or $1.25 per share. In fiscal 2010, the company paid quarterly dividends totaling $9.9 million, or 55 cents per share. In fiscal 2009, the company paid quarterly dividends totaling $9.4 million, or 52 cents per share; paid a special dividend of $22.5 million, or $1.25 per share and repurchased $5.2 million of stock. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As of January 31, 2011, 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, 2011 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 Less than 1 year 1-3 years 3-5 years More than 5 years $ — $ — $ — $ — $ 355 5,969 56,812 — 237 212 56,812 — $ 63,136 $ 57,261 $ 118 460 — — 578 — 504 — — 504 $ — — 4,793 — — $ 4,793 (a) (b) $8.0 million line bears interest at 4.0% as of January 31, 2011 and expires July 2011. The line of credit is reduced by outstanding letters of credit totaling $1.3 million. The total liability for uncertain tax positions at January 31, 2011, was $4.2 million. The company is not able to reasonably estimate the timing of future payments relating to non-current tax benefits. CRITICAL ACCOUNTING ESTIMATES Critical accounting policies are those that require the application of judgment when valuing assets and liabilities on the company's balance sheet. 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. 23 Inventories 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 Raven's customers may result in unexpected excess material. Electronic Systems 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. Warranties 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. 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. Revenue Recognition Estimated returns or sales allowances 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. Goodwill and Long-lived Assets Management assesses goodwill for impairment annually—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 by reporting units which are the company's reportable segments. In the first step of goodwill impairment testing, the corporate discount rate is calculated so that the discounted cash flows are equal to Raven's net enterprise value. The corporate discount rate is then increased when evaluating any individual reporting unit due to any additional risk factors inherent within the unit versus the corporation as a whole. A discounted cash flow analysis is then completed for the reporting unit using the adjusted discount rate. The discounted cash flow assumptions primarily include forecasted sales and costs and the discount rate. Management evaluates the merits of each significant assumption used to determine the fair value of the reporting unit. The estimated fair value of the reporting unit is then compared with its net assets. If the estimated fair value of the reporting unit is less than the net assets of the reporting unit, an impairment loss is possible and a more refined measurement of the impairment loss would take place. This is the second step of the goodwill impairment testing, in which management may use market comparisons and recent transactions to assign the fair value of the reporting unit to all of the assets and liabilities of that unit. The valuation methodologies in both steps of goodwill impairment testing 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. For long-lived assets, including intangibles; investments in affiliates; and property, plant and equipment, management tests for recoverability whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable. Property, plant and equipment are depreciated over the estimated lives of the assets using accelerated methods, which reduces the likelihood of an impairment loss. Management periodically discusses any significant changes in the utilization of long-lived assets, which may result from—but are not limited to—an adverse change in the asset's physical condition or a significant adverse change in the business climate. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining its fair value. Uncertain Tax Positions Accounting for tax positions requires judgments, including estimating reserves for uncertainties associated with the interpretation 24 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 In December 2010, the Financial Accounting Standards Board issued guidance on goodwill impairment testing. This guidance modifies the first step of the goodwill impairment test to include reporting units with zero or negative carrying amounts. For these reporting units, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. The guidance is effective for fiscal years and interim periods beginning after December 15, 2010. The adoption of this guidance on February 1, 2011, is not expected to have a material impact on the company's consolidated results of operation, financial condition or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The exposure to market risks pertains mainly to changes in interest rates on cash and cash equivalents and short-term investments. The company has no debt. The company does not expect operating results or cash flows to be significantly affected by changes in interest rates. Additionally, the company does not enter into derivatives or other financial instruments for trading or speculative purposes. However, the company does utilize derivative financial instruments to manage the economic impact of fluctuation in foreign currency exchange rates on those transactions that are denominated in currency other than its functional currency, which is the U.S. dollar. The use of these financial instruments had no material effect on the company's financial condition, results of operations or cash flows. The company's subsidiaries that operate outside the United States use their local currency as the functional currency. The functional currency is translated into U.S. dollars for balance sheet accounts using the period-end exchange rates, and average exchange rates for the statement of income. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in accumulated other comprehensive income (loss) within shareholders' equity. Foreign currency transaction gains or losses are recognized in the period incurred and are included in "interest income and other, net" in the Consolidated Statements of Income. Foreign currency fluctuations had no material effect on the company's financial condition, results of operations or cash flows. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Equity and Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Quarterly Information (Unaudited) - included in Item 5 on page 10 Page(s) 27 28 29 30 31 32 33 10 26 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, 2011, our internal control over financial reporting was effective. The effectiveness of our reporting as of January 31, 2011, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears on the next page. internal control over financial Daniel A. Rykhus /s/ Daniel A. Rykhus President & Chief Executive Officer March 31, 2011 Thomas Iacarella /s/ Thomas Iacarella Vice President & Chief Financial Officer 27 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, of shareholders' equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Raven Industries, Inc. and its subsidiaries (the "Company") at January 31, 2011, 2010 and 2009 and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2011 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, 2011 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, included in Management's Report on Internal Control over Financial Reporting on the preceding page. 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. 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 /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota March 31, 2011 28 RAVEN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) ASSETS Current assets Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property, plant and equipment, net Goodwill Other assets, net Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable Accrued liabilities Customer advances Total current liabilities Other liabilities Commitments and contingencies 2011 As of January 31 2010 2009 $ $ $ 37,563 1,000 39,967 43,679 2,733 3,239 $ 40,684 3,000 34,327 34,475 2,471 2,790 128,181 117,747 41,522 10,777 7,280 187,760 16,715 16,096 1,524 34,335 12,211 $ $ 33,029 10,699 8,834 170,309 12,398 12,256 1,306 25,960 11,098 $ $ $ 16,267 — 40,278 35,977 2,542 3,009 98,073 35,880 7,450 3,012 144,415 9,433 13,281 608 23,322 7,537 Shareholders' equity 141,214 133,251 113,556 Common shares, par value $1.00 per share Authorized – 100,000 Outstanding – 2011: 18,062; 2010: 18,030; 2009: 18,012 Total liabilities and shareholders' equity $ 187,760 $ 170,309 $ 144,415 The accompanying notes are an integral part of the consolidated financial statements. 29 RAVEN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Net sales Cost of sales Gross profit Research and development expenses Selling, general and administrative expenses Gain on disposition of assets Operating income Interest income and other, net Income before income taxes Income taxes Net income Net income per common share: - Basic - Diluted The accompanying notes are an integral part of the consolidated financial statements. For the years ended January 31 2011 2010 2009 $ 314,708 $ 237,782 $ 279,913 223,279 169,930 206,465 91,429 7,604 24,073 (451) 67,852 5,843 18,789 — 73,448 5,848 21,206 — 60,203 43,220 46,394 (79) (102) (507) 60,282 19,745 40,537 2.24 2.24 $ $ $ 43,322 14,748 28,574 1.58 1.58 $ $ $ 46,901 16,131 30,770 1.71 1.70 $ $ $ 30 RAVEN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) $1 Par common stock Paid-in capital Treasury stock Cost Shares Retained earnings Accumulated other comprehensive income (loss) Total Balance January 31, 2008 $ 32,408 $ 3,436 (14,288) $ (48,182) $ 132,219 $ (1,606) $ 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 — — — — — — — — — 7 18 — Stock surrendered upon exercise of stock options (34) (1,258) Employees' stock options exercised Share-based compensation Tax benefit from exercise of stock options 83 4 — 1,176 1,024 128 — — — — — — — — — — (161) (5,180) — — — — — — — — 30,770 — — (9,381) (22,528) — — — — — — 698 (246) — — — — — — — 30,770 698 (246) 31,222 (9,374) (22,510) (5,180) (1,292) 1,259 1,028 128 Balance January 31, 2009 32,461 4,531 (14,449) (53,362) 131,080 (1,154) 113,556 Net income Postretirement benefits, net of ($122) income tax Foreign currency translation Total comprehensive income Dividends ($.55 per share) Stock surrendered upon exercise of stock options Employees' stock options exercised Share-based compensation Tax cost from exercise of stock options — — — — (51) 65 3 — — — — 11 (1,319) 1,374 1,031 (24) — — — — — — — — — — — — — — — — 28,574 — — (9,922) — — — — — (226) 179 — — — — — 28,574 (226) 179 28,527 (9,911) (1,370) 1,439 1,034 (24) Balance January 31, 2010 32,478 5,604 (14,449) (53,362) 149,732 (1,201) 133,251 Net income Postretirement benefits, net of ($25) income tax Foreign currency translation Total comprehensive income Dividends ($.64 per share) Dividends (special—$1.25 per share) Stock surrendered upon exercise of stock options Employees' stock options exercised Share-based compensation Tax benefit from exercise of stock options — — — — — (79) 112 — — — — — 17 32 (3,038) 3,257 1,179 9 — — — — — — — — — — — — — — — — — — 40,537 — — (11,563) (22,581) — — — — — (46) 127 — — — — — — 40,537 (46) 127 40,618 (11,546) (22,549) (3,117) 3,369 1,179 9 Balance January 31, 2011 $ 32,511 $ 7,060 (14,449) $ (53,362) $ 156,125 $ (1,120) $ 141,214 The accompanying notes are an integral part of the consolidated financial statements. 31 RAVEN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) For the years ended January 31 2011 2010 2009 $ 40,537 $ 28,574 $ 30,770 6,512 1,119 (451) 274 (195) — 423 1,179 (7,273) (40) 42,085 (13,972) (1,700) 3,700 — (399) 888 65 (11,418) (34,095) — 9 252 (33,834) 46 (3,121) 40,684 37,563 6,611 497 — 94 (10) (183) 95 1,034 10,935 (4) 47,643 (3,302) (3,500) 500 (5,000) (2,000) — (94) (13,396) (9,911) — — 44 (9,867) 37 24,417 16,267 40,684 7,345 413 — — — 629 216 1,028 (1,346) (18) 39,037 (8,001) (2,100) 3,600 — (488) — (11) (7,000) (31,884) (5,180) 128 (33) (36,969) (73) (5,005) 21,272 16,267 $ $ Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization of intangible assets Gain on disposition of assets Change in fair value of acquisition-related contingent consideration Earnings of equity investee 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 Purchase of equity investment Payments related to business acquisitions Proceeds from disposition of assets Other investing activities, net Net cash used in investing activities 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 Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ The accompanying notes are an integral part of the consolidated financial statements. 32 RAVEN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of Raven Industries, Inc. and its wholly owned subsidiaries (the company 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 operates three divisions (Applied Technology, Engineered Films and Electronic Systems) in addition to four wholly owned subsidiaries: Aerostar International, Inc. (Aerostar); Raven Industries Canada, Inc. (Raven Canada); Raven Industries GmbH (Raven GmbH); and Raven Industries Australia Pty Ltd (Raven Australia). Intercompany balances and transactions have been eliminated in consolidation. Investments in Affiliate An affiliate investment over which the company has significant influence, but neither a controlling interest nor a majority interest in the risks or rewards of the investee, is accounted for using the equity method. The investment balance is included in “other assets, net,” while the company's share of the investee's results of operations is included in “interest income and other, net.” The company considers whether the value of any of its equity method investments has been impaired whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the company considered any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and the overall health of the affiliate's industry), a write-down would be recorded. Use of Estimates Preparing the 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 statements, 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 average 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 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 savings 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. Inventory Valuation Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis. Market value encompasses consideration of all business factors including price, contract terms and usefulness. Property, Plant and Equipment Property, plant and equipment are stated at cost and are depreciated over the estimated useful lives of the assets using accelerated methods. The estimated useful lives used for computing depreciation are as follows: 33 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Building and improvements Manufacturing equipment by segment Applied Technology Engineered Films Aerostar Electronic Systems Furniture, fixtures, office equipment and other 15 - 39 years 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. The company capitalizes certain costs incurred in connection with developing or obtaining internal-use software in accordance with the accounting guidance for such costs. Capitalized software costs totaled $1,280 in fiscal 2011, $914 in fiscal 2010 and $297 in fiscal 2009. The costs are included in “Property, Plant and Equipment, net” on the Consolidated Balance Sheets. Software costs that do not meet capitalization criteria are expensed as incurred. Amortization expense related to capitalized software is included in depreciation. Included in accounts payable at January 31, 2011 was $2,181 related to capital expenditures. Comparable amounts for 2010 and 2009 were not significant. 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 business over the net amount assigned to assets acquired and liabilities assumed. For business combinations prior to February 1, 2009, earn-out payments to sellers are added to goodwill when payable under the terms of the purchase agreement. For business combinations after February 1, 2009, earn-out payments are accrued at fair value as of the purchase date, and payments reduce the accrual without affecting goodwill. Any change in the fair value of the contingent consideration after the acquisition date is recognized in the statements of income. Goodwill is tested for impairment on an annual basis during the fourth quarter and between annual tests whenever a triggering event indicates there is an impairment. 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. Insurance Obligations Raven employs insurance policies to cover workers' compensation and general liability costs. Liabilities are accrued related to claims filed and estimates for claims incurred but not reported. To the extent these obligations are expected to 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 estimate of the loss on these matters is charged to operations when it is probable that an asset has been impaired or a liability has been incurred, and the amount of the loss can be reasonably estimated. 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 34 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) 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 sales.” Operating Expenses The primary types of operating expenses are classified in the income statement as follows: Cost of sales Direct material costs Material acquisition and handling costs Direct labor Factory overhead including depreciation Inventory obsolescence Product warranties Research and development expenses Personnel costs Professional service fees Material and supplies Facility allocation Selling, general and administrative expenses Personnel costs Professional service fees Advertising Promotions Information technology equipment depreciation Office supplies The company's gross margins may not be comparable to industry peers due to variability in the classification of these expenses across the industries in which the company operates. 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. 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 allowance to reflect realizable value, when necessary. Accruals are maintained for uncertain tax positions. New Accounting Standards In December 2010, the Financial Accounting Standards Board issued guidance on goodwill impairment testing. This guidance modifies the first step of the goodwill impairment test to include reporting units with zero or negative carrying amounts. For these reporting units, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. The guidance is effective for fiscal years and interim periods beginning after December 15, 2010. The adoption of this guidance on February 1, 2011, is not expected to have a material impact on the company's consolidated results of operation, financial condition or cash flows. 35 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) NOTE 2 SELECTED BALANCE SHEET INFORMATION Following are the components of selected balance sheet items: As of January 31 2011 2010 2009 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 40,267 (300) 39,967 7,994 5,424 30,261 43,679 1,909 1,330 3,239 1,798 24,972 75,310 (60,558) 41,522 3,200 1,660 (3,275) 1,585 4,728 924 43 7,280 3,264 3,186 253 3,356 1,627 1,437 1,453 1,520 16,096 5,757 2,230 4,224 12,211 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 34,624 (297) 34,327 6,283 4,172 24,020 34,475 2,300 490 2,790 1,227 22,973 64,119 (55,290) 33,029 3,200 1,633 (2,648) 2,185 5,010 1,580 59 8,834 1,148 2,693 180 3,959 217 1,259 1,574 1,226 12,256 5,283 2,301 3,514 11,098 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 40,891 (613) 40,278 6,062 3,258 26,657 35,977 2,119 890 3,009 1,227 22,593 62,504 (50,444) 35,880 2,300 1,314 (2,143) 1,471 — 1,482 59 3,012 1,891 2,581 1,333 3,615 436 1,004 1,266 1,155 13,281 4,637 — 2,900 7,537 Accounts receivable, net: Trade accounts Allowance for doubtful accounts Inventories: Finished goods In process Materials Other current assets: Insurance policy benefit Prepaid expenses and other Property, plant and equipment, net: Land Buildings and improvements Machinery and equipment Accumulated depreciation Other assets, net: Amortizable assets: Purchased technology Other intangibles Accumulated amortization Investment in affiliate Deferred income taxes Other, net Accrued liabilities: Salaries and benefits Vacation 401(k) contributions Insurance obligations Profit sharing Warranties Taxes - accrued and withheld Other Other liabilities: Postretirement benefits Acquisition-related contingent consideration Uncertain tax positions 36 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) NOTE 3 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income refers to revenue, expenses, gains and losses that under U.S. generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The components of accumulated other comprehensive income (loss) are shown below: Foreign currency translation Postretirement benefits, net of tax Total accumulated other comprehensive loss 2011 As of January 31 2010 $ $ 183 (1,303) (1,120) $ $ 56 (1,257) (1,201) $ $ 2009 (123) (1,031) (1,154) NOTE 4 SUPPLEMENTAL CASH FLOW INFORMATION Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other assets Accounts payable Accrued and other liabilities Customer advances Cash paid during the year for income taxes For the years ended January 31 2011 2010 2009 $ $ $ (5,536) (9,189) 96 2,713 4,428 215 (7,273) 19,700 $ $ $ 6,325 1,552 (49) 2,934 (520) 693 10,935 13,816 $ $ $ (4,603) 447 (35) 963 2,194 (312) (1,346) 15,072 NOTE 5 ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES In November 2009, the company acquired a 20% interest in Site Specific Technology Development Group, Inc. (SST) for $5,000. SST is a privately held agricultural software development and information services provider. Raven and SST are strategically aligned to provide customers with simple, more efficient ways to move and manage information in the precision agriculture market. At the acquisition date, the carrying value of the SST investment exceeded the company’s share of the underlying net assets of SST by $4,976. The company's analysis of this excess determined that it related to $1,054 of technology-related assets to be amortized over a seven-year period and $3,200 of license-related assets to be amortized over a ten-year period. The remainder of the excess is attributable to equity method goodwill. Changes in the net carrying value of the investment in SST (Investment in Affiliate) were as follows: Balance at January 31, 2010 Raven's share of SST earnings Amortization of intangible assets Balance at January 31, 2011 $ $ 5,010 195 (477) 4,728 In November 2009, the company purchased substantially all of the assets of Ranchview, Inc., a privately held Canadian corporation for $1,500 cash and contingent consideration valued at $2,310. Raven agreed to pay additional consideration on a quarterly basis of 6% on future sales of Ranchview products, up to a maximum payment of $4,000. Ranchview developed products that use cellular networks instead of the traditional radio systems that are typically used to deliver RTK (Real Time Kinematic) corrections to GPS enabled equipment. RTK corrections improve the accuracy of GPS equipment. The network can also be used to provide high-speed Internet access. 37 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) The allocation of the purchase price is summarized below: Goodwill Existing technology Other intangibles Total $ $ 2,734 900 175 3,809 The goodwill associated with Ranchview is deductible for tax purposes. Purchased identifiable intangible assets are amortized on a straight-line basis over their respected useful lives. The estimated useful life is six years for existing technology and five to seven years for the remaining intangibles. The results of operations of Ranchview for periods prior to the company’s acquisition were not material to the company’s Consolidated Statements of Income and, accordingly, pro forma results of operations have not been presented. This operation has been combined into the Applied Technology Division. NOTE 6 GOODWILL AND OTHER INTANGIBLES Goodwill The changes in the carrying amount of goodwill by reporting segment are shown below: Balance at January 31, 2008 Acquisition earn-outs Balance at January 31, 2009 Acquired goodwill Acquisition earn-outs Balance at January 31, 2010 Acquisition earn-outs Balance at January 31, 2011 Applied Technology 5,909 $ 548 6,457 2,734 515 9,706 78 9,784 $ Engineered Films Electronic Systems Aerostar Total $ $ 96 — 96 — — 96 — 96 $ $ 433 — 433 — — 433 — 433 $ $ 464 — 464 — — 464 — 464 $ $ 6,902 548 7,450 2,734 515 10,699 78 10,777 Intangible Assets Estimated future amortization expense based on the current carrying value of amortizable intangible assets for fiscal periods 2012 through 2016 is $601, $245, $237, $200 and $133, respectively. NOTE 7 EMPLOYEE RETIREMENT BENEFITS The company has a 401(k) plan covering substantially all employees. Prior to January 1, 2010, the company contributed 3% of qualified payroll. Starting January 1, 2010, the company began matching employee contributions up to a maximum of 4% of pay. Raven's contribution expense was $1,254, $1,085 and $1,158 for fiscal 2011, 2010 and 2009, 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 investments. The accumulated benefit obligation for these benefits is shown below: Benefit obligation at beginning of year Service cost Interest cost Actuarial (gain) loss and assumption changes Total recognized in net and other comprehensive income Retiree benefits paid For the years ended January 31 2010 2011 2009 $ $ 5,512 62 324 237 623 (166) $ 4,840 55 332 476 863 (191) 5,447 67 361 (847) (419) (188) Benefit obligation at end of year $ 5,969 $ 5,512 $ 4,840 38 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) The liability and expense reflected in the balance sheet and income statement were as follows: Beginning liability balance Employer expense Other comprehensive (income) loss Total recognized in net and other comprehensive income Retiree benefits paid Ending liability balance Current portion in accrued liabilities Long-term portion in other liabilities Assumptions used: Discount rate Wage inflation rate For the years ended January 31 2010 2009 2011 $ $ $ $ 5,512 552 71 623 (166) 5,969 212 5,757 $ $ $ $ 4,840 515 348 863 (191) 5,512 229 5,283 $ $ $ $ 5,447 654 (1,073) (419) (188) 4,840 203 4,637 5.75% 4.00% 6.00% 3.00% 7.00% 3.00% 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 2011 was 9.00% compared with 9.51% and 8.97% for fiscal 2010 and 2009. 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 $965. The rate to which the fiscal 2011 health care cost trend rate is assumed to decline is 5.00%, which is the ultimate trend rate. The fiscal year that the rate reaches the ultimate trend rate is expected to be fiscal 2025. NOTE 8 WARRANTIES Changes in the warranty accrual were as follows: Beginning balance Accrual for warranties Settlements made (in cash or in kind) Ending balance NOTE 9 INCOME TAXES As of January 31 2011 2010 2009 $ $ 1,259 2,461 (2,283) 1,437 $ $ 1,004 2,426 (2,171) 1,259 $ $ 684 2,760 (2,440) 1,004 The reconciliation of income tax computed at the federal statutory rate to the company's effective income tax rate was as follows: 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 2010 2009 2011 35.0% 1.3 (3.0) (0.7) 0.2 32.8% 35.0% 1.3 (2.1) (0.7) 0.5 34.0% 35.0% 1.5 (2.0) (0.7) 0.6 34.4% 39 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Significant components of the company's income tax provision were as follows: Income taxes: Currently payable Deferred For the years ended January 31 2010 2011 2009 $ $ 19,322 423 19,745 $ $ 14,653 95 14,748 $ $ 15,915 216 16,131 Deferred Tax Assets Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities 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: 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 2011 As of January 31 2010 2009 $ $ 103 463 1,008 485 503 171 2,733 2,014 (3,050) 1,426 534 924 3,657 $ $ 103 344 857 553 441 173 2,471 1,849 (1,970) 1,180 521 1,580 4,051 $ $ 211 408 840 489 352 242 2,542 1,623 (1,556) 969 446 1,482 4,024 Pre-tax book income for the U.S. companies was $59,454 and was $772 for the Canadian subsidiary. As of January 31, 2011, undistributed earnings of the Canadian subsidiary were considered to have been reinvested indefinitely and, accordingly, the company has not provided United States income taxes on such earnings. Uncertain Tax Positions A summary of the activity related to the gross unrecognized tax benefits (excluding interest and penalties) is as follows: 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 statute of limitations Gross unrecognized tax benefits at end of year For the years ended January 31 2010 2011 2009 $ $ 2,656 601 (145) 3,112 $ $ 2,269 463 (76) 2,656 $ $ 1,793 539 (63) 2,269 During the fiscal year ended January 31, 2011, 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 $2,023, $1,727 and $1,475 as of January 31, 2011, January 31, 2010, and January 31, 2009, respectively. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. At January 31, 2011, January 31, 2010 and January 31, 2009, accrued interest and penalties were $1,112, $857 and $630, respectively. 40 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) The company files tax returns, including returns for its subsidiaries, with various federal, state and local jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. As of January 31, 2011, federal tax returns filed in the U.S., Canada and Switzerland for fiscal years ended January 31, 2008 - 2010 remain subject to examination by federal tax authorities. In state and local jurisdictions, tax returns for fiscal years ended January 31, 2003 - 2010 remain subject to examination by state and local tax authorities. NOTE 10 FINANCING ARRANGEMENTS Raven has an uncollateralized credit agreement providing a line of credit of $8,000 with a maturity date of July 1, 2011, bearing interest at the prime rate with a minimum rate of 4.00%. Letters of credit totaling $1,342 have been issued under the line, primarily to support self-insured workers' compensation bonding requirements. No borrowings were outstanding as of January 31, 2011, 2010 and 2009, and $6,658 was available at January 31, 2011. 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 facilities under operating leases. Total rent and lease expense was $546, $328 and $353 in fiscal 2011, 2010 and 2009, respectively. Future minimum lease payments under non-cancelable operating leases for fiscal periods 2012 to 2014 are $237, $80 and $38 respectively, with all leases scheduled to expire during fiscal 2014. NOTE 11 SHARE-BASED COMPENSATION At January 31, 2011, Raven had two shareholder approved share-based compensation plans, which are described below. The compensation cost and related income tax benefit for these plans were as follows: Stock compensation cost Tax benefit Compensation cost capitalized as part of inventory is not significant. For the years ended January 31 2010 2011 2009 $ 1,179 272 $ 1,034 184 $ 1,028 200 Stock Option and Compensation Plans The 2010 Stock Incentive Plan 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. The 2000 Stock Option and Compensation Plan terminated in May 2010 and no further awards are available under the plan. The shareholders approved the 2010 Stock Incentive Plan pursuant to which 500 shares of common stock are reserved for grant of which 339 were remaining at January 31, 2011. There were no stock awards in fiscal 2011. Fiscal 2010 compensation cost included $144 of expense recognized as a result of a 4.8 share stock award. Fiscal 2009 compensation cost included $135 of expense recognized as a result of a 5.5 share stock award. 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. 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 2011 2010 2009 1.46% 1.49% 49.33% 4.50 2.03% 1.73% 49.69% 4.50 1.64% 2.12% 46.32% 4.25 Weighted average grant date fair value $ 15.70 $ 11.28 $ 8.08 41 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Outstanding stock options as of January 31, 2011 and activity for the year then ended are presented below: Oustanding, January 31, 2010 Granted Exercised Forfeited Outstanding, January 31, 2011 Exercisable, January 31, 2011 Number of options Weighted average exercise price Aggregate intrinsic value Weighted average remaining contractual term (years) 397 160 (112) — 445 160 $ $ $ 29.33 42.31 30.03 24.51 33.86 29.41 $ $ 5,953 2,850 3.30 2.04 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 $1,102, $314 and $1,874 during the years ended January 31, 2011, 2010 and 2009, respectively. As of January 31, 2011, the total compensation cost for non-vested awards not yet recognized in the company's statements of income was $3,016, net of the effect of estimated forfeitures. This amount is expected to be recognized over a weighted average period of 2.83 years. Deferred Stock Compensation Plan for Directors The Deferred Stock Compensation Plan for Directors of Raven Industries, Inc. is administered by the Governance Committee of the board of directors. 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 common shares for the conversion of stock units into common stock after directors retire from the board. 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 underlying shares. Outstanding stock units as of January 31, 2011 and changes during the year then ended are presented below: Oustanding, January 31, 2010 Granted Deferred retainers Dividends Converted into common shares Outstanding, January 31, 2011 Number of units Weighted average price 21 4 1 1 — 27 $ $ 28.58 34.96 34.96 37.81 — 47.24 NOTE 12 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. For fiscal 2011, 2010 and 2009, 128, 338 and 168 options, respectively, were excluded from the diluted net income per-share calculation. 42 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Details of the computation are presented below: Numerator: Net income Denominator: Weighted average common shares outstanding Weighted average stock units outstanding Denominator for basic calculation Weighted average common shares outstanding Weighted average stock units outstanding Dilutive impact of stock options Denominator for diluted calculation Net income per share - basic Net income per share - diluted For the years ended January 31 2010 2011 2009 $ 40,537 $ 28,574 $ 30,770 18,042 25 18,067 18,042 25 43 18,110 2.24 2.24 $ $ 18,021 19 18,040 18,021 19 3 18,043 $ $ 1.58 1.58 $ $ 18,031 13 18,044 18,031 13 36 18,080 1.71 1.70 NOTE 13 BUSINESS SEGMENTS AND MAJOR CUSTOMER INFORMATION The company's reportable segments are defined by their common technologies, production processes and inventories. These segments reflect Raven's organization into three Raven divisions and the Aerostar subsidiary. Raven Canada, Raven GmbH and Raven Australia are included in the Applied Technology Division. Substantially all of the company's long-lived assets are located in the United States. Applied Technology products are electronic and Global Positioning System (GPS) devices. They are used primarily on agricultural sprayers for precision farming applications. The segment has developed products for field location control, chemical injection and automated steering. Engineered Films produces rugged reinforced plastic sheeting for industrial, construction and agriculture applications. Aerostar sells high-altitude and tethered aerostats for government and commercial research and military parachutes. It produces uniforms and protective wear for U.S. government agencies as a subcontractor and also manufactures other sewn and sealed products on a contract basis. Electronic System's capabilities are focused on electronics manufacturing services (EMS) for commercial customers with a focus on high-mix, low-volume production. Assemblies manufactured by the Electronic Systems segment include avionics, communication, environmental controls and other products where high quality is critical. 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 reporting structure. 43 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Business segment information is as follows: APPLIED TECHNOLOGY DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization ENGINEERED FILMS DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization AEROSTAR DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization ELECTRONIC SYSTEMS DIVISION Sales Operating income Assets Capital expenditures Depreciation and amortization INTERSEGMENT ELIMINATIONS Sales Engineered Films Division Aerostar Electronic Systems Division Operating income Assets REPORTABLE SEGMENTS TOTAL Sales Operating income Assets Capital expenditures Depreciation and amortization CORPORATE & OTHER(a) Operating (loss) from administrative expenses Assets Capital expenditures Depreciation and amortization TOTAL COMPANY Sales Operating income Assets Capital expenditures Depreciation and amortization (a) Assets are principally cash, investments, deferred taxes and other receivables. (b) Includes a $451 pre-tax gain on disposition of assets. 44 For the years ended January 31 2010 2009 2011 $ $ $ $ $ $ $ $ $ $ (b) $ $ $ $ (b) 100,090 31,135 52,669 1,769 2,238 105,838 19,622 46,519 8,450 3,452 48,787 9,407 18,140 2,190 757 65,852 9,917 23,385 609 823 (307) (32) (5,520) (94) (186) 314,708 69,987 140,527 13,018 7,270 86,217 25,722 51,029 941 1,677 63,783 10,232 35,999 1,460 3,707 27,244 5,634 10,462 332 398 63,525 8,979 21,216 290 939 (210) (1) (2,776) 60 (92) 237,782 50,627 118,614 3,023 6,721 (9,784) 47,233 954 361 $ (7,407) 51,695 279 387 $ (b) 314,708 60,203 187,760 13,972 7,631 237,782 43,220 170,309 3,302 7,108 $ $ $ $ $ $ $ $ 103,098 33,884 48,881 2,674 1,383 89,858 10,919 35,862 3,120 4,303 27,186 4,219 8,744 383 444 61,983 5,926 26,847 1,399 1,159 (210) (25) (1,977) (52) (152) 279,913 54,896 120,182 7,576 7,289 (8,502) 24,233 425 469 279,913 46,394 144,415 8,001 7,758 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Sales to a customer of the Electronic Systems segment accounted for 13%, 16% and 13% of consolidated sales in fiscal 2011, 2010 and 2009, respectively, and 11%, 13% and 18% of consolidated accounts receivable at the end of fiscal 2011, 2010 and 2009, respectively. The table below provides a summary of net sales by principal product categories: Pit lining and geomembrane films Other plastic films Agricultural precision control devices and accessories Electronics manufacturing services Tethered aerostats Parachute-related products Uniforms and protective wear Other Total sales For the years ended January 31 2011 2010 2009 $ 55,048 50,483 98,402 60,333 22,423 12,816 4,559 10,644 $ 26,834 36,739 83,236 60,749 3,048 10,298 5,434 11,444 $ 40,205 49,443 99,428 60,006 265 8,660 9,976 11,930 $ 314,708 $ 237,782 $ 279,913 Foreign sales are attributed to product delivered to non-U.S. locations. Sales to countries outside the United States, primarily to Canada, were as follows: Applied Technology Engineered Films Aerostar Electronic Systems Total foreign sales For the years ended January 31 2010 2011 2009 $ $ 21,349 2,200 427 693 24,669 $ $ 17,140 1,383 1,219 495 20,237 $ $ 18,847 2,034 1,004 568 22,453 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures As of January 31, 2011, the end of the period covered by this report, management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), evaluated the effectiveness of the company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of such date. Based on that evaluation, the CEO and CFO have concluded that the company's disclosure controls and procedures were effective as of January 31, 2011. Management's Report on Internal Control Over Financial Reporting Management’s annual report on internal control over financial reporting and the report of the company's independent registered public accounting firm appear in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K Report. Changes in Internal Control Over Financial Reporting There were no changes in the company's internal control over financial reporting that occurred during the fiscal quarter ended January 31, 2011, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION Not applicable. 46 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Incorporated by reference to the sections entitled “Election of Directors,” “Board of Directors and Committees,” “Corporate Governance,” and “Other Matters” within the company's Proxy Statement relating to its 2011 Annual Meeting of Shareholders. Information regarding executive officers is set forth in Item 1 of Part 1 of this Report under the caption “Executive Officers” . ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the sections entitled “Executive Compensation” and “Non-management Director Compensation” within the company's Proxy Statement relating to its 2011 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS Incorporated by reference to the section entitled “Ownership of Common Stock” within the company’s Proxy Statement relating to its 2011 Annual Meeting of Shareholders. The remaining information called for by this item relating to “Securities Authorized for Issuance under Equity Compensation Plans” is incorporated by reference to the section entitled “Equity Compensation Plan Information” contained in the company’s Proxy Statement relating to its 2011 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Incorporated by reference to the sections entitled “Board of Directors and Committees” and “Corporate Governance” contained in the company’s Proxy Statement relating to its 2011 Annual Meeting of Shareholders. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Incorporated by reference to the section entitled “Independent Registered Public Accounting Firm Fees,” contained in the company’s Proxy Statement relating to its 2011 Annual Meeting of Shareholders. 47 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE LIST OF DOCUMENTS FILED AS PART OF THIS REPORT Financial Statements See PART II, Item 8. Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. Exhibits See index to Exhibits on the following page. 48 Exhibit Number Description 3(a) Articles of Incorporation of Raven Industries, Inc. and all amendments thereto.* 3(b) Bylaws of Raven Industries, Inc.* 3(c) Extract of Shareholders Resolution adopted on April 7, 1962 with respect to the bylaws of Raven Industries, Inc. * 10(a) Employment Agreement between Raven Industries, Inc. and Daniel Rykhus dated as of February 1, 2009 (incorporated by reference to Exhibit 10.1 of the company's Form 8-K filed February 1, 2009). † 10(b) Employment Agreement between Raven Industries, Inc. and David R. Bair dated as of February 1, 2004. † *** 10(c) Employment Agreement between Raven Industries, Inc. and James D. Groninger dated as of February 1, 2004. † *** 10(d) Employment Agreement between Raven Industries, Inc. and Lon E. Stroschein dated as of October 1, 2010 (Incorporated by reference to Exhibit 10.1 to the company's 8-K filed October 1, 2010) † 10(e) Employment Agreement between Raven Industries, Inc. and Ronald M. Moquist dated as of February 1, 2004. † ** 10(f) Employment Agreement between Raven Industries, Inc. and Thomas Iacarella dated as of February 1, 2004. † ** 10(g) Schedule A to Employment Agreements between Raven Industries, Inc. and each of the following Senior Executive Officers: Ronald M. Moquist, Thomas Iacarella, and Daniel A. Rykhus. † 10(h) Employment Agreement between Raven Industries, Inc. and Barbara Ohme dated as of February 1, 2004. † ** 10(i) Change in Control Agreement between Raven Industries, Inc. and each of the following officers and key employees: Ronald M. Moquist, Thomas Iacarella, Daniel A. Rykhus, David R. Bair, James D. Groninger and Barbara K. Ohme dated as of January 31, 2008 (incorporated by reference to Exhibit 10.1 of the company's 8-K filed December 17, 2007). † 10(j) Trust Agreement between Raven Industries, Inc. and Norwest Bank South Dakota, N.A. dated April 26, 1989. * 10(k) 10(l) 10(m) 10(n) 10(o) 10(p) 10(q) 21 23 Raven Industries, Inc. 2000 Stock Option and Compensation Plan adopted May 24, 2000 (incorporated by reference to Exhibit A to the company's definitive Proxy Statement filed April 19, 2000).† Raven Industries, Inc. 2010 Stock Incentive Plan adopted May 25, 2010 (incorporated by reference to Exhibit A of the company's definitive Proxy Statement filed April 14, 2010).† Raven Industries, Inc. Deferred Compensation Plan for Directors adopted May 23, 2007 (incorporated by reference to Exhibit 10.1 to the company's 8-K filed May 24, 2007). † Change in Control Agreement between Raven Industries, Inc. and Matthew T. Burkhart dated February 1, 2010 (incorporated by reference to Exhibit 10.3 to the company's 8-K filed February 2, 2010). † Employment Agreement between Raven Industries, Inc. and Matthew T. Burkhart dated February 1, 2010 (incorporated by reference to Exhibit 10.1 to the company's 8-K filed February 2, 2010). † Schedule A to Employment Agreements between Raven Industries, Inc. and each of the following Senior Managers: David R. Bair, Matthew T. Burkhart, James D. Groninger, Lon E. Stroschein and Barbara K. Ohme. † Change in Control Agreement between Raven Industries, Inc. and Lon E. Stroschein dated October 1, 2010 (incorporated by reference to Exhibit 10.3 to the company's 8-K filed October 1, 2010). Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm. 31.1 Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act. 31.2 Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act. 32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act. 32.2 Certification pursuant to Section 906 of Sarbanes-Oxley Act. † * ** *** Management contract or compensatory plan or arrangement. Incorporated by reference to corresponding Exhibit Number of the company's Form 10-K for the year ended January 31, 1989. Incorporated by reference to corresponding Exhibit Number of the company's Form 10-K for the year ended January 31, 2004. Incorporated by reference to corresponding Exhibit Number of the company's Form 10-K for the year ended January 31, 2007. 49 SIGNATURES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAVEN INDUSTRIES, INC. (Registrant) By: /s/ DANIEL A RYKHUS Daniel A. Rykhus President and Chief Executive Officer Date: March 31, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ DANIEL A RYKHUS Daniel A. Rykhus President and Chief Executive Officer (principal executive officer) and Director /s/ MARK E. GRIFFIN Mark E. Griffin Director /s/ THOMAS IACARELLA /s/ CONRAD J. HOIGAARD Thomas Iacarella Vice President and Chief Financial Officer (principal financial and accounting officer) /s/ THOMAS S. EVERIST Thomas S. Everist Chairman of the Board /s/ ANTHONY W. BOUR Anthony W. Bour Director /s/ DAVID A. CHRISTENSEN David A. Christensen Director Conrad J. Hoigaard Director /s/ KEVIN T. KIRBY Kevin T. Kirby Director /s/ CYNTHIA H. MILLIGAN Cynthia H. Milligan Director Date: March 31, 2011 50 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Raven Industries, Inc.: Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated March 31, 2011 appearing elsewhere in this Annual Report on Form 10-K of Raven Industries, Inc. also included an audit of the financial statement schedule listed in Item 15 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Minneapolis, Minnesota March 31, 2011 51 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS for the years ended January 31, 2011, 2010 and 2009 (in thousands) Column A Column B Column C Additions Column D Column E Description Deducted in the balance sheet from the asset to which it applies: Allowance for doubtful accounts: Year ended January 31, 2011 Year ended January 31, 2010 Year ended January 31, 2009 Note: Balance at Beginning of Year Charged to Costs and Expenses Charged to Other Accounts Deductions From Reserves (1) Balance at End of Year $ $ $ 297 613 293 $ $ $ (1) (183) 629 None None None $ $ $ (4) 133 309 $ $ $ 300 297 613 (1) Represents uncollectible accounts receivable written off during the year, net of recoveries. 52 InnovatIon In serving our key markets of precision agriculture, surveillance and barrier films, we are helping to solve some of our world’s most important challenges in the areas of hunger, safety, peace and stability. at the core of our continued success is innovation backed by a strong competitive drive. In fiscal 2011, we enjoyed broad-based revenue gains and our profitability improved despite significantly higher spending for new capabilities and product development that will support long-term growth. with an aggressive growth agenda and a strong capital base, we are on course to realize even greater potential. the following pages of this report show how raven will build on its successes in fiscal 2011 by following a path of investing in new products, new applications, acquisitions and capacity expansion. InveStor InFormatIon Annual Meeting may 24, 2011, 9:00 a.m. CDt 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 2011 was the 24th- consecutive year we raised our annual dividend. Raven Website www.ravenind.com Independent Registered Public Accounting Firm pricewaterhouseCoopers llp minneapolis, mn Stock Quotations listed on the nasdaq ngS Stock market – ravn Stock Transfer Agent & Registrar wells Fargo Bank, n.a. 161 n. Concord exchange p.o. Box 64854 South St. paul, mn 55164-0854 phone: 800-468-9716 website: www.shareowneronline.com Form 10-K raven Industries, Inc.’s Form 10-K for the fiscal year ended January 31, 2011, which has been filed with the Securities and exchange Commission, is available free of charge on the company’s website, or upon written request to the Investor relations Department. Inquiries mail to: Contact: raven Industries, Inc. Investor relations p.o. Box 5107 Sioux Falls, SD 57117-5107 phone: 605-336-2750 e-mail: irinfo@ravenind.com Affirmative Action Plan raven Industries, Inc. and aerostar International, Inc. are equal employment opportunity employers with approved affirmative action plans. InSIDe thIS report letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 raven at a glance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 operations review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 executive team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 10-K table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10K-2 management’s Discussion and analysis . . . . . . . . . . . . . . . . 10K-14 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10K-26 Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inside back cover . m o c m m o c t i l l i f . w w w s n o i t a c i n u m m o C t i l l i F y b d e 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 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 the company’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. InnovatIon & Strong CompetItIve DrIve an n ual r eport 2011 rave n I n DuStr I e S po B ox 51 07 SIoux Fa llS, SD 57 1 17 -5 1 07 ww w.rave n I n D.Com 

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