Form 10-Q for quarter ended October 31, 2013

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2013
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission File Number: 001-07982
RAVEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
South Dakota
(State or other jurisdiction of incorporation or organization)
 
46-0246171
(IRS Employer Identification No.)
205 East 6th Street, P.O. Box 5107, Sioux Falls, SD 57117-5107
(Address of principal executive offices)
(605) 336-2750
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of November 27, 2013 there were 36,407,560 shares of common stock, $1 par value, of Raven Industries, Inc. outstanding. There were no other classes of stock outstanding.
 



RAVEN INDUSTRIES, INC.
INDEX
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures



PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollars and shares in thousands, except per-share data)
October 31,
2013
 
January 31,
2013
 
October 31,
2012
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
48,648

 
$
49,353

 
$
48,087

Accounts receivable, net
63,960

 
56,303

 
55,462

Inventories
51,396

 
46,189

 
50,024

Deferred income taxes
3,631

 
3,107

 
3,264

Other current assets
2,639

 
1,796

 
2,790

Total current assets
170,274

 
156,748

 
159,627

 
 
 
 
 
 
Property, plant and equipment, net
95,804

 
81,238

 
77,392

Goodwill
22,274

 
22,274

 
22,274

Amortizable intangible assets, net
8,433

 
8,681

 
8,753

Other assets, net
3,779

 
4,269

 
4,129

TOTAL ASSETS
$
300,564

 
$
273,210

 
$
272,175

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
15,470

 
$
14,438

 
$
13,262

Accrued liabilities
18,594

 
17,192

 
25,248

Customer advances
1,513

 
1,431

 
906

Total current liabilities
35,577

 
33,061

 
39,416

 
 
 
 
 
 
Other liabilities
18,657

 
18,702

 
19,178

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Common stock, $1 par value, authorized shares 100,000; issued 65,293; 65,223; and 65,215, respectively
65,293

 
65,223

 
65,215

Paid-in capital
9,326

 
5,885

 
5,056

Retained earnings
227,149

 
205,695

 
198,428

Accumulated other comprehensive loss
(2,176
)
 
(2,095
)
 
(1,852
)
Treasury stock at cost, 28,897 shares
(53,362
)
 
(53,362
)
 
(53,362
)
Total Raven Industries, Inc. shareholders' equity
246,230

 
221,346

 
213,485

Noncontrolling interest
100

 
101

 
96

Total shareholders' equity
246,330

 
221,447

 
213,581

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
300,564

 
$
273,210

 
$
272,175


The accompanying notes are an integral part of the unaudited consolidated financial statements.

#3
                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended
 
Nine Months Ended
(Dollars in thousands, except per-share data)
October 31,
2013
 
October 31,
2012
 
October 31,
2013
 
October 31,
2012
Net sales
$
104,938

 
$
97,011

 
$
302,039

 
$
316,600

Cost of sales
72,998

 
67,436

 
208,448

 
215,826

Gross profit
31,940

 
29,575

 
93,591

 
100,774

 
 
 
 
 
 
 
 
Research and development expenses
3,958

 
3,498

 
12,183

 
10,462

Selling, general and administrative expenses
9,850

 
9,705

 
29,774

 
28,101

Operating income
18,132

 
16,372

 
51,634

 
62,211

 
 
 
 
 
 
 
 
Other (expense), net
(43
)
 
(56
)
 
(460
)
 
(204
)
Income before income taxes
18,089

 
16,316

 
51,174

 
62,007

 
 
 
 
 
 
 
 
Income taxes
5,796

 
5,454

 
16,550

 
20,554

Net income
12,293

 
10,862

 
34,624

 
41,453

 
 
 
 
 
 
 
 
Net income (loss) attributable to the noncontrolling interest
4

 
3

 
(1
)
 
5

 
 
 
 
 
 
 
 
Net income attributable to Raven Industries, Inc.
$
12,289

 
$
10,859

 
$
34,625

 
$
41,448

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
      ─ Basic
$
0.34

 
$
0.30

 
$
0.95

 
$
1.14

      ─ Diluted
$
0.34

 
$
0.30

 
$
0.95

 
$
1.13

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.12

 
$
0.105

 
$
0.36

 
$
0.315

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
12,293

 
$
10,862

 
$
34,624

 
$
41,453

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(53
)
 
41

 
(170
)
 
(4
)
Postretirement benefits, net of income tax benefit of $15, $20, $47 and $61, respectively
30

 
38

 
89

 
114

Other comprehensive (loss) income, net of tax
(23
)
 
79

 
(81
)
 
110

 
 
 
 
 
 
 
 
Comprehensive income
12,270

 
10,941

 
34,543

 
41,563

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to noncontrolling interest
4

 
3

 
(1
)
 
5

 
 
 
 
 
 
 
 
Comprehensive income attributable to Raven Industries, Inc.
$
12,266

 
$
10,938

 
$
34,544

 
$
41,558


The accompanying notes are an integral part of the unaudited consolidated financial statements.

#4
                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
$1 Par Common Stock
Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Raven Industries, Inc. Equity
Non- controlling Interest
Total Equity
(Dollars in thousands, except per-share amounts)
Shares
Cost
Balance January 31, 2012
$
32,566

$
9,607

(14,449
)
$
(53,362
)
$
193,650

$
(1,962
)
$
180,499

$
91

$
180,590

Net income
—

—

—

—

41,448

—

41,448

5

41,453

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Cumulative foreign currency translation adjustment
—

—

—

—

—

(4
)
(4
)
—

(4
)
Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $61
—

—

—

—

—

114

114

—

114

Cash dividends ($0.315 per share) 
—

47

—

—

(11,477
)
—

(11,430
)
—

(11,430
)
Two-for-one stock split
32,598

(7,405
)
(14,448
)
—

(25,193
)
—

—

—

—

Stock surrendered upon exercise of stock options
(36
)
(2,213
)
—

—

—

—

(2,249
)
—

(2,249
)
Employees' stock options exercised
87

2,376

—

—

—

—

2,463

—

2,463

Share-based compensation
—

2,387

—

—

—

—

2,387

—

2,387

Tax benefit from exercise of stock options
—

257

—

—

—

—

257

—

257

Balance October 31, 2012
$
65,215

$
5,056

(28,897
)
$
(53,362
)
$
198,428

$
(1,852
)
$
213,485

$
96

$
213,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 31, 2013
$
65,223

$
5,885

(28,897
)
$
(53,362
)
$
205,695

$
(2,095
)
$
221,346

$
101

$
221,447

Net income (loss)
—

—

—

—

34,625

—

34,625

(1
)
34,624

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Cumulative foreign currency translation adjustment
—

—

—

—

—

(170
)
(170
)
—

(170
)
Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $47
—

—

—

—

—

89

89

—

89

Cash dividends ($0.36 per share)
—

77

—

—

(13,171
)
—

(13,094
)
—

(13,094
)
Stock surrendered upon exercise of stock options
(54
)
(1,663
)
—

—

—

—

(1,717
)
—

(1,717
)
Employees' stock options exercised
124

1,479

—

—

—

—

1,603

—

1,603

Share-based compensation
—

3,289

—

—

—

—

3,289

—

3,289

Tax benefit from exercise of stock options
—

259

—

—

—

—

259

—

259

Balance October 31, 2013
$
65,293

$
9,326

(28,897
)
$
(53,362
)
$
227,149

$
(2,176
)
$
246,230

$
100

$
246,330

 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.


#5
                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended
(Dollars in thousands)
October 31,
2013
 
October 31,
2012
OPERATING ACTIVITIES:
 
 
 
Net income
$
34,624

 
$
41,453

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,264

 
9,595

Gain on acquisition-related contingent liability settlement
—

 
(508
)
Change in fair value of acquisition-related contingent consideration
382

 
706

Loss from equity investment
114

 
72

Deferred income taxes
(1,202
)
 
(1,067
)
Share-based compensation expense
3,289

 
2,387

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(7,753
)
 
5,202

Inventories
(5,251
)
 
4,735

Prepaid expense and other assets
(819
)
 
42

Operating liabilities
2,852

 
(4,960
)
Other operating activities, net
703

 
389

Net cash provided by operating activities
37,203

 
58,046

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(23,906
)
 
(22,840
)
Other investing activities, net
(613
)
 
(125
)
Net cash used in investing activities
(24,519
)
 
(22,965
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Dividends paid
(13,094
)
 
(11,430
)
Payments of acquisition-related contingent liability
(353
)
 
(1,867
)
Other financing activities, net
145

 
471

Net cash used in financing activities
(13,302
)
 
(12,826
)
 
 
 
 
Effect of exchange rate changes on cash
(87
)
 
(10
)
 
 
 
 
Net increase in cash and cash equivalents
(705
)
 
22,245

Cash and cash equivalents at beginning of year
49,353

 
25,842

Cash and cash equivalents at end of period
$
48,648

 
$
48,087


The accompanying notes are an integral part of the unaudited consolidated financial statements.

#6

RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per-share amounts)

(1) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Raven Industries, Inc. (the Company or Raven) is a diversified technology company providing a variety of products to customers within the industrial, agricultural, energy, construction and military/aerospace markets. The Company is comprised of three unique operating units, or divisions, classified into reportable segments: Applied Technology, Engineered Films and Aerostar.
The accompanying unaudited consolidated financial information, which includes the accounts of Raven and its wholly-owned or controlled subsidiaries, net of intercompany balances and transactions which have been eliminated, has been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, it does not include all of the information and notes required by GAAP for complete financial statements. This financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2013.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim three- and nine-month periods ended October 31, 2013 are not necessarily indicative of the results that may be expected for the year ending January 31, 2014. The January 31, 2013 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. Preparing financial statements in conformity with GAAP 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 period. Actual results could differ from those estimates.
Noncontrolling interests represent capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities. The Company owns a 75% interest in an entity consolidated under the Aerostar business segment. Given the Company's majority ownership interest, the accounts of the business venture have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling investor interests in the net assets and operations of the business venture.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2013.

(3) 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), stock units and restricted stock units outstanding. Performance share awards are included in the diluted calculation based upon what would be issued if the end of the most recent reporting period was the end of the term of the award.
Certain outstanding options and restricted stock units were excluded from the diluted net income per-share calculations because their effect would have been anti-dilutive under the treasury stock method.

The options and restricted stock units excluded from the diluted net income per-share share calculation were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2013
 
October 31,
2012
 
October 31,
2013
 
October 31,
2012
Anti-dilutive options and restricted stock units
594,200
 
367,511
 
573,033
 
397,600
 
 
 
 
 
 
 
 

#7
(Dollars in thousands, except per-share amounts)


The computation of earnings per share is presented below:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2013
 
October 31,
2012
 
October 31,
2013
 
October 31,
2012
Numerator:
 
 
 
 
 
 
 
Net income attributable to Raven Industries, Inc.
$
12,289

 
$
10,859

 
$
34,625

 
$
41,448

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,391,195

 
36,306,224

 
36,367,412

 
36,279,061

Weighted average stock units outstanding
71,220

 
56,814

 
66,477

 
54,202

Denominator for basic calculation
36,462,415

 
36,363,038

 
36,433,889

 
36,333,263

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,391,195

 
36,306,224

 
36,367,412

 
36,279,061

Weighted average stock units outstanding
71,220

 
56,814

 
66,477

 
54,202

Dilutive impact of stock options and restricted stock units
186,305

 
166,857

 
179,741

 
206,436

Denominator for diluted calculation
36,648,720

 
36,529,895

 
36,613,630

 
36,539,699

 
 
 
 
 
 
 
 
Net income per share - basic
$
0.34

 
$
0.30

 
$
0.95

 
$
1.14

Net income per share - diluted
$
0.34

 
$
0.30

 
$
0.95

 
$
1.13



#8
(Dollars in thousands, except per-share amounts)

(4) SELECTED BALANCE SHEET INFORMATION

Following are the components of selected items from the Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
 
October 31, 2013
 
January 31, 2013
 
October 31, 2012
Accounts receivable, net:
 
 
 
 
 
 
     Trade accounts
 
$
64,164

 
$
56,508

 
$
55,667

     Allowance for doubtful accounts
 
(204
)
 
(205
)
 
(205
)
 
 
$
63,960

 
$
56,303

 
$
55,462

Inventories:
 
 
 
 
 
 
Finished goods
 
$
7,591

 
$
8,571

 
$
8,347

In process
 
2,743

 
2,675

 
3,647

Materials
 
41,062

 
34,943

 
38,030

 

$
51,396


$
46,189


$
50,024

Property, plant and equipment, net:
 
 
 
 
 
 
     Property, plant and equipment
 
$
177,428

 
$
156,658

 
$
151,122

     Accumulated depreciation
 
(81,624
)
 
(75,420
)
 
(73,730
)
 
 
$
95,804

 
$
81,238

 
$
77,392

Accrued liabilities:
 
 
 
 
 
 
Salaries and benefits
 
$
3,120

 
$
4,265

 
$
5,175

Vacation
 
4,149

 
4,025

 
4,038

401(k) contributions
 
446

 
520

 
500

Insurance obligations
 
2,496

 
2,506

 
2,949

Warranties
 
2,210

 
1,888

 
1,879

Acquisition-related contingent liabilities
 
730

 
712

 
7,154

Taxes - accrued and withheld
 
3,754

 
1,392

 
1,990

Other
 
1,689

 
1,884

 
1,563

 
 
$
18,594

 
$
17,192

 
$
25,248

Other liabilities:
 
 
 
 
 
 
Postretirement benefits
 
$
8,304

 
$
8,072

 
$
7,589

Acquisition-related contingent consideration
 
2,323

 
2,359

 
2,231

Deferred income taxes
 
1,824

 
2,453

 
3,477

Uncertain tax positions
 
6,206

 
5,818

 
5,881

 
 
$
18,657

 
$
18,702

 
$
19,178


(5) ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

Ranchview
Pursuant to the Company's 2009 purchase of substantially all of the assets of Ranchview Inc. (Ranchview), a privately held Canadian corporation, Raven agreed to pay contingent consideration for future sales of Ranchview products up to a maximum of $4,000. During the first quarter of fiscal 2013, the Company paid $1,841 in cash to the previous Ranchview owner for an early buyout of the outstanding acquisition-related contingent liability. This resulted in a gain of $508 which is included in Applied Technology operating income for the nine-month period ended October 31, 2012.

(6) EMPLOYEE POSTRETIREMENT BENEFITS

The Company provides postretirement medical and other benefits to senior executive officers and senior managers. These plan obligations are unfunded. The components of net periodic benefit cost for postretirement benefits are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2013
 
October 31,
2012
 
October 31,
2013
 
October 31,
2012
Service cost
$
51

 
$
46

 
$
152

 
$
140

Interest cost
87

 
84

 
261

 
252

Amortization of actuarial losses
45

 
59

 
136

 
175

Net periodic benefit cost
$
183

 
$
189

 
$
549

 
$
567



#9
(Dollars in thousands, except per-share amounts)

Postretirement benefit cost components are reclassified in their entirety from accumulated other comprehensive loss to net periodic benefit cost.  Net periodic benefit costs are reported in net income as “Cost of sales” or “Selling, general and administrative expenses” in a manner consistent with the classification of direct labor and personnel costs of the eligible employees.

(7) 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. Changes in the warranty accrual were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2013
 
October 31,
2012
 
October 31,
2013
 
October 31,
2012
Beginning balance
$
2,047

 
$
1,949

 
$
1,888

 
$
1,699

Accrual for warranties
1,086

 
628

 
2,818

 
2,226

Settlements made (in cash or in kind)
(923
)
 
(698
)
 
(2,496
)
 
(2,046
)
Ending balance
$
2,210

 
$
1,879

 
$
2,210

 
$
1,879


(8) FINANCING ARRANGEMENTS

Raven has an uncollateralized credit agreement with Wells Fargo Bank, N.A. providing a line of credit of $10,500 with a maturity date of November 30, 2014, bearing interest at 1.50% above the daily one-month London Inter-bank Market Rate. Letters of credit totaling $850 have been issued under the line of credit, primarily to support self-insured workers' compensation bonding requirements. No other borrowings were outstanding as of October 31, 2013, January 31, 2013 or October 31, 2012, and $9,650 was available at October 31, 2013.

(9) DIVIDENDS

Dividends paid during the three and nine months ended October 31, 2013 were $4,367 and $13,094, respectively, or 12.0 cents and 36.0 cents per share, respectively. Dividends paid during the three and nine months ended October 31, 2012 were $3,812 and $11,430, respectively, or 10.5 cents and 31.5 cents per share, respectively.

(10) SHARE-BASED COMPENSATION

Under the Amended and Restated 2010 Stock Incentive Plan effective March 23, 2012, administered by the Personnel and Compensation Committee of the Board of Directors, two types of awards were granted during the nine months ended October 31, 2013 and October 31, 2012. None of these awards were granted during the three-month period ended October 31, 2013. There were stock option awards granted in the three-month period ended October 31, 2012, further described in the following paragraphs.

Stock Option Awards
On March 25, 2013, the Company granted 198,900 non-qualified stock options. On April 2, 2012, the Company granted 151,200 non-qualified stock options. On August 27, 2012, the Company granted an additional 7,600 non-qualified stock options. Options are granted with exercise prices not less than market value of the Company's common stock 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 exercises and employee terminations within this valuation model.

The fair values of options granted were estimated using the following weighted average assumptions:
 
 
Nine Months Ended
 
 
October 31, 2013
 
October 31, 2012
Risk-free interest rate
 
0.59
%
 
0.86
%
Expected dividend yield
 
1.46
%
 
1.33
%
Expected volatility factor
 
41.39
%
 
49.62
%
Expected option term (in years)
 
3.75

 
3.75



#10
(Dollars in thousands, except per-share amounts)

The weighted average grant date fair value of options granted during the nine months ended October 31, 2013 was $9.34. The weighted average grant date fair value of options granted during the nine months ended October 31, 2012 was $10.92.

Restricted Stock Unit Awards (RSUs)
On March 25, 2013, the Company granted 25,540 time-vested RSUs to employees. On April 2, 2012, the Company granted 21,120 time-vested RSUs to employees. The fair value of a time-vested RSU is measured based upon the closing market price of the Company's common stock on the date of grant. The grant date fair value of the time-vested RSUs granted during the nine months ended October 31, 2013 and 2012 was $32.85 and $31.66, respectively. Time-vested RSUs will vest if, at the end of the three-year period, the employee remains employed by the Company. Dividends are cumulatively earned on the time-vested RSUs over the vesting period.

The Company also granted performance-based RSUs on March 25, 2013 and April 2, 2012. The exact number of performance shares to be issued will vary from 0% to 150% of the target award, depending on the Company's actual performance over the three-year period in comparison to the target award based on return on sales (ROS), which is defined as net income divided by net sales. The performance-based RSUs will vest if, at the end of the three-year performance period, the Company has achieved certain performance goals and the employee remains employed by the Company. Dividends are cumulatively earned on performance-based RSUs over the vesting period. The number of RSUs that will vest is determined by an estimated ROS target over the three-year performance period. The estimated ROS performance used to estimate the number of restricted stock units expected to vest is evaluated at least quarterly. The number of restricted stock units issued at the vesting date will be based on actual results.

The fair value of the performance-based restricted stock units is based upon the closing market price of the Company's common stock on the grant date. The number of performance-based RSUs granted is based on 100% of the target award. During the nine-month periods ended October 31, 2013 and 2012, the Company granted 56,222 and 50,940 performance-based RSUs, respectively. The grant date fair value of these performance-based RSUs was $32.85 and $31.66, respectively.

(11) SEGMENT REPORTING

The Company's reportable segments are defined by their product lines which have been grouped in these segments based on common technologies, production methods and inventories. Raven's reportable segments are Applied Technology Division, Engineered Films Division and Aerostar Division. The Company measures the performance of its segments based on their operating income excluding administrative and general expenses. Other 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.

Business segment net sales and operating income results are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2013
 
October 31,
2012
 
October 31,
2013
 
October 31,
2012
Net sales
 
 
 
 
 
 
 
Applied Technology Division
$
43,797

 
$
39,534

 
$
134,069

 
$
133,346

Engineered Films Division
40,241

 
33,316

 
111,998

 
111,195

Aerostar Division
24,269

 
26,385

 
66,706

 
78,865

Intersegment eliminations (a)
(3,369
)
 
(2,224
)
 
(10,734
)
 
(6,806
)
Consolidated net sales
$
104,938

 
$
97,011

 
$
302,039

 
$
316,600

 
 
 
 
 
 
 
 
Operating income
 
 
 
 
 
 
 
Applied Technology Division
$
15,149

 
$
12,289

 
$
46,176

 
$
47,248

Engineered Films Division
5,241

 
4,729

 
14,765

 
20,727

Aerostar Division
2,714

 
3,830

 
5,484

 
7,581

Intersegment eliminations (a)
(23
)
 
(25
)
 
(61
)
 
(87
)
Total reportable segment income
23,081

 
20,823

 
66,364

 
75,469

Administrative and general expenses
(4,949
)
 
(4,451
)
 
(14,730
)
 
(13,258
)
Consolidated operating income
$
18,132

 
$
16,372

 
$
51,634

 
$
62,211

(a) Intersegment sales were primarily from Aerostar to Applied Technology.


#11

(12) NEW ACCOUNTING STANDARDS

Accounting Standards Adopted
During the nine months ended October 31, 2013 the following accounting pronouncements were adopted or effective that are of significance, or potential significance, to the Company.

In February 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI)" (ASU No. 2013-02). ASU No. 2013-02 requires that an entity present, either on the face of the statement where net income is reported or in the notes, the effect of significant reclassifications out of AOCI to net income when GAAP requires that the amount be reclassified in its entirety to net income. For amounts not required to be entirely reclassified to net income, ASU No. 2013-02 requires the cross-referencing of these amounts to other disclosures that provide detail about these amounts. This guidance, required to be applied prospectively, was effective for the Company on February 1, 2013. The adoption of this guidance had no effect on the Company's consolidated financial position, results of operations or cash flows as it is disclosure-only in nature.

Pending Accounting Standards
At October 31, 2013 there are no accounting pronouncements pending that are of significance, or potential significance, to the Company.

#12


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following commentary on the operating results, liquidity, capital resources and financial condition of Raven Industries, Inc. (the Company or Raven) should be read in conjunction with the unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended January 31, 2013. There have been no material changes to the Company's critical accounting policies discussed therein.

EXECUTIVE SUMMARY
Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, energy, construction and military/aerospace markets. The Company is comprised of unique operating units, classified into three reportable segments: Applied Technology Division, Engineered Films Division and Aerostar Division. While each segment has distinct characteristics, the products and technologies are largely extensions of durable competitive advantages rooted in the original research balloon business.
Management uses a number of metrics to assess the Company's performance:
•
Consolidated net sales, gross margins, operating income, operating margins, net income and earnings per share
•
Cash flow from operations and shareholder returns
•
Return on sales, assets and equity
•
Segment net sales, gross profit, gross margins, operating income and operating margins

Vision and Strategy
At Raven, there is a singular purpose behind everything we do. It is: to solve great challenges. Great challenges require great solutions. Solutions driven by quality, service, innovation and peak performance set Raven apart in the development of technology that helps the world grow more food, produce more energy, protect the environment and live safely.
The Raven business model is our platform for success. Our business model is defensible, sustainable and gives us a consistent approach in the pursuit of quality financial results. This overall approach to creating value, which is employed across the three unique business segments, is summarized as follows:
•
Serve a set of diversified market segments with attractive near- and long-term growth prospects;
•
Consistently manage a pipeline of growth initiatives within our market segments;
•
Aggressively compete on quality, service, innovation and peak performance;
•
Hold ourselves accountable for continuous improvement;
•
Value our balance sheet as a source of strength and stability; and
•
Make corporate responsibility a top priority.
 
The diversified business model enables us to weather near-term challenges, while continuing to grow and build for our future. It is our culture and it is woven into how we do business.


#13

Results of Operations
Consolidated financial highlights for the fiscal third quarter and nine months ended October 31, 2013 and 2012 include the following:
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands, except per-share data)
October 31,
2013
 
October 31,
2012
 
% Change
 
October 31,
2013
 
October 31,
2012
 
% Change
Net sales
$
104,938

 
$
97,011

 
8
%
 
$
302,039

 
$
316,600

 
(5
)%
Gross profit
31,940

 
29,575

 
8
%
 
93,591

 
100,774

 
(7
)%
Gross margins(a)
30.4
%
 
30.5
%
 
 
 
31.0
%
 
31.8
%
 
 
Operating income
$
18,132

 
$
16,372

 
11
%
 
$
51,634

 
$
62,211

 
(17
)%
Operating margins
17.3
%
 
16.9
%
 
 
 
17.1
%
 
19.6
%
 
 
Net income attributable to Raven Industries, Inc.
$
12,289

 
$
10,859

 
13
%
 
$
34,625

 
$
41,448

 
(16
)%
Diluted earnings per share
$
0.34

 
$
0.30

 
 
 
$
0.95

 
$
1.13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating cash flow
 
 
 
 
 
 
$
37,203

 
$
58,046

 
 
Capital expenditures
 
 
 
 
 
 
$
(23,906
)
 
$
(22,840
)
 
 
Cash dividends
 
 
 
 
 
 
$
(13,094
)
 
$
(11,430
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) 
The Company's gross and operating margins may not be comparable to industry peers due to the diversity of its operations and variability in the classification of expenses across industries in which the Company operates.

Net income attributable to Raven for the three months ended October 31, 2013 was $12.3 million, or $0.34 per diluted share, compared to $10.9 million, or $0.30 per diluted share, in the prior year comparative period. For the third quarter, net sales were $104.9 million, up $7.9 million from $97.0 million in the prior-year third quarter. Net sales in the Engineered Films and Applied Technology divisions were strong, growing 21% and 11%, respectively. Aerostar sales declined 8% reflecting the transition away from contract manufacturing and the current constraints on federal spending.

For the nine-month period, net sales decreased 5% to $302.0 million from $316.6 million one year earlier. For the same period, net income attributable to Raven was $34.6 million, or $0.95 per diluted share, down 16% from $41.4 million, or $1.13 per diluted share, in fiscal 2013. Engineered Films and Applied Technology division net sales were up slightly for the nine-month period while Aerostar division continued to be down compared to last year's results for the nine-month period. The primary drivers of the decrease in net income was the profit impact of reduced sales along with lower gross margins in Engineered Films combined with higher research and development and operating expenses.

Applied Technology
Third quarter fiscal 2014 net sales were $43.8 million, up $4.3 million, or 11%, as compared to the prior year period and operating income increased $2.9 million, or 23%, to $15.1 million for the same comparative period. For the nine-month period, net sales were up 1% to $134.1 million as compared to $133.3 million in the prior year period and operating income decreased $1.1 million, or 2%, to $46.2 million. The slight increase in year-to-date sales levels over the prior year reflects third quarter demand from OEM customers, rising international performance in Brazil and strong contributions from new product introductions. These strengths offset the softness of demand during the first quarter of fiscal 2014 compared to fiscal 2013. Lower operating income is primarily the result of the flat sales as well as continued investment in research, marketing and product development to secure future growth.

Engineered Films
For the fiscal 2014 third quarter, net sales grew $6.9 million, or 21%, to $40.2 million as compared with $33.3 million the third quarter of last year. Third quarter operating income of $5.2 million improved 11% year-over-year. Fiscal 2014 year-to-date net sales increased $0.8 million, or 1%, to $112.0 million and operating income of $14.8 million was down 29% from the prior year period. For the fiscal third quarter, higher volumes contributed to the overall net sales. Year-to-date, higher sales in the agriculture markets substantially offset lower energy market sales. Operating income for the three- and nine-month periods was constrained by significantly higher resin costs than the comparative periods.


#14

Aerostar
Fiscal 2014 third quarter net sales were $24.3 million compared to $26.4 million in the previous year's third quarter, a $2.1 million decrease. Operating income decreased by $1.1 million, or 29%, to $2.7 million from the previous year third quarter results. Fiscal 2014 year-to-date net sales of $66.7 million were down $12.2 million from $78.9 million and operating income of $5.5 million was $2.1 million, or 28%, lower than fiscal 2013 year-to-date comparative results. The net sales decrease was due primarily to a shift away from Aerostar's contract manufacturing business. Increased sales of lighter-than-air products and Vista radar system sales partially offset these expected decreases. The lower volume of contract manufacturing services was the main driver of the operating income decline for the three- and nine-month periods ended October 31, 2013 as compared to the prior year periods.

RESULTS OF OPERATIONS - SEGMENT ANALYSIS

Applied Technology
Applied Technology designs, manufactures, sells and services innovative precision agriculture products and information management tools that help growers reduce costs, precisely control inputs and improve farm yields around the world.
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
October 31,
2013
 
October 31,
2012
 
$ Change
 
% Change
 
October 31,
2013
 
October 31,
2012
 
$ Change
 
% Change
Net sales
$
43,797

 
$
39,534

 
$
4,263

 
11
 %
 
$
134,069

 
$
133,346

 
$
723

 
1
 %
Gross profit
20,880

 
18,069

 
2,811

 
16
 %
 
63,323

 
63,318

 
5

 
—
 %
Gross margins
47.7
%
 
45.7
%
 
 
 
 
 
47.2
%
 
47.5
%
 
 
 
 
Operating expenses
$
5,731

 
$
5,780

 
$
(49
)
 
(1
)%
 
$
17,147

 
$
16,070

 
$
1,077

 
7
 %
Operating expenses as % of sales
13.1
%
 
14.6
%
 
 
 
 
 
12.8
%
 
12.1
%
 
 
 
 
Operating income
$
15,149

 
$
12,289

 
$
2,860

 
23
 %
 
$
46,176

 
$
47,248

 
$
(1,072
)
 
(2
)%
Operating margins
34.6
%
 
31.1
%
 
 
 
 
 
34.4
%
 
35.4
%
 
 
 
 

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

•
Market conditions. Global market fundamentals remained healthy. With the world’s population growing toward 9 billion and income growth in emerging economies, demand for food continues to increase. Apprehension given the drought conditions last year and falling commodity prices put pressure on domestic demand through the second quarter of fiscal 2014, but after-market demand rose in the third quarter. Original equipment manufacturing (OEM) demand also stayed robust for certain products. Emerging agriculture markets abroad are at varying life cycle stages providing opportunities for Raven's precision agriculture products to meet market needs. Growth in these international markets has moderated in some areas of the world while there is strength in others. The Company continues to invest in growth internationally for the long term.
•
Sales volume. Third quarter fiscal 2014 net sales increased $4.3 million, or 11%, to $43.8 million compared to $39.5 million in the prior year third quarter. Demand from OEM customers along with rising after-market demand drove sales of products such as guidance and steering systems, field computers, boom controls and application controls higher, making up the majority of the sales increase. Year-to-date sales of $134.1 million were slightly above the prior year comparative results by $0.7 million or 1%. Strong international OEM demand for guidance and steering products and boom controls contributed to the higher sales year-to-date, but these increases were partially offset due to weaker demand in the U.S. aftermarket and timing of demand experienced in the fiscal 2014 first quarter.
•
International sales. For the three-month period, international sales totaled $9.8 million, increasing 15% from a year ago and representing 22% of segment revenue compared to 21% in the prior year three-month period. International sales of $34.7 million accounted for 26% of segment revenue for the nine-month period ending October 31, 2013. This percentage of revenue remained consistent with the prior year nine-month period but represented a slight sales decline of $0.2 million year-over-year. Product deliveries to Brazil increased year-over-year; however, lower demand in Canada, South Africa and Eastern Europe offset this increase for both the three- and nine-month periods.
•
Gross margins. Gross margins increased to 47.7% for the three months ended October 31, 2013 from 45.7% for the three months ended October 31, 2012 primarily due to higher sales volume. Current year-to-date gross margins were comparable to the prior year.
•
Operating expenses. Third quarter operating expense as a percentage of net sales was 13.1%, down from 14.6% in the prior year third quarter. The current quarter percentage was impacted by higher sales volumes quarter-over-quarter. The prior year third quarter percentage also includes the effect of bad debt expense associated with an international customer. Year-to-date operating expenses as a percentage of net sales was 12.8% compared to 12.1% for fiscal 2013. The increase is attributable to higher spending in research and development (R&D) on virtually flat sales volumes.


#15




Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for industrial, energy, construction, geomembrane and agricultural applications.

 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
October 31,
2013
 
October 31,
2012
 
$ Change
 
% Change
 
October 31,
2013
 
October 31,
2012
 
$ Change
 
% Change
Net sales
$
40,241

 
$
33,316

 
$
6,925

 
21
 %
 
$
111,998

 
$
111,195

 
$
803

 
1
 %
Gross profit
6,354

 
6,348

 
6

 
—
 %
 
18,990

 
25,119

 
(6,129
)
 
(24
)%
Gross margins
15.8
%
 
19.1
%
 
 
 
 
 
17.0
%
 
22.6
%
 
 
 
 
Operating expenses
$
1,113

 
$
1,619

 
$
(506
)
 
(31
)%
 
$
4,225

 
$
4,392

 
$
(167
)
 
(4
)%
Operating expenses as % of sales
2.8
%
 
4.9
%
 
 
 
 
 
3.8
%
 
3.9
%
 
 
 
 
Operating income
$
5,241

 
$
4,729

 
$
512

 
11
 %
 
$
14,765

 
$
20,727

 
$
(5,962
)
 
(29
)%
Operating margins
13.0
%
 
14.2
%
 
 
 
 
 
13.2
%
 
18.6
%
 
 
 
 

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

•
Market conditions. Beginning in the second quarter of fiscal 2014, demand has strengthened for agriculture barrier films used in high value crop production. The addition of new extrusion capacity earlier in fiscal 2014 was a key factor in meeting demand for these high-tech films. Demand for pit liners in our energy market, declining since the beginning of the second half of fiscal 2013, has rebounded during the third quarter of fiscal 2014. Environmental and water conservation projects increase demand for the division's containment liners in the geomembrane market and provide sales growth opportunities for these products.
•
Sales volume and selling prices. Fiscal 2014 third quarter net sales were up 21% to $40.2 million compared to the prior year third quarter net sales of $33.3 million. Sales volume (as measured by pounds shipped), fueled by sales of fumigation and silage films in the agriculture market, was up about 19% as compared to the prior year quarter. Year-to-date fiscal 2014 net sales were 1%, or $0.8 million, ahead of last year's sales. Agriculture market sales were up $6.7 million, or 48%, year-to-date, substantially offsetting the energy market declines, primarily during the first quarter of fiscal 2014 and lower geomembrane sales which included sales for a significant geomembrane reservoir project in Ohio in the prior year. Current year-to-date net sales also reflect a modest increase in sales volume partially offset by a decrease in selling price.
•
Gross margins. For the three- and nine-month periods, margins decreased 3.3 and 5.6 percentage points, respectively. The current year periods were impacted by substantially higher resin costs combined with market conditions that did not allow pass-through costs.
•
Operating expenses. Fiscal 2014 third quarter operating expense as a percentage of net sales was 2.8% compared to 4.9% in the prior year three-month period. In addition to the sales increase, project timing also reduced R&D spending resulting in the improved percentages. Year-to-date operating expenses of $4.2 million were down $0.2 million, or 4%, compared to the prior year.

Aerostar
Aerostar designs and manufactures surveillance technology and specialty-sewn and sealed products including tethered aerostats, high-altitude scientific balloons, protective wear, parachutes, military decoys and marine navigation equipment. Aerostar also provides electronics manufacturing services (EMS) with a focus on high-mix, low-volume production. Assemblies manufactured by the Aerostar segment include avionics, communication, environmental controls and other products where high quality is critical.

Aerostar acquired Vista Research, Inc. (Vista) at the end of fiscal 2012. Vista's smart-sensing radar systems (SSRS) use sophisticated signal processing algorithms and are employed in a host of detection and tracking applications, including wide-area surveillance for border patrol and the military.

#16

 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
October 31,
2013
 
October 31,
2012
 
$ Change
 
% Change
 
October 31,
2013
 
October 31,
2012
 
$ Change
 
% Change
Net sales
$
24,269

 
$
26,385

 
$
(2,116
)
 
(8
)%
 
$
66,706

 
$
78,865

 
$
(12,159
)
 
(15
)%
Gross profit
4,729

 
5,183

 
(454
)
 
(9
)%
 
11,339

 
12,424

 
(1,085
)
 
(9
)%
Gross margins
19.5
%
 
19.6
%
 
 
 
 
 
17.0
%
 
15.8
%
 
 
 
 
Operating expenses
$
2,015

 
$
1,353

 
$
662

 
49
 %
 
$
5,855

 
$
4,843

 
$
1,012

 
21
 %
Operating expenses as % of sales
8.3
%
 
5.1
%
 
 
 
 
 
8.8
%
 
6.1
%
 
 
 
 
Operating income
$
2,714

 
$
3,830

 
$
(1,116
)
 
(29
)%
 
$
5,484

 
$
7,581

 
$
(2,097
)
 
(28
)%
Operating margins
11.2
%
 
14.5
%
 
 
 
 
 
8.2
%
 
9.6
%
 
 
 
 

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

•
Market conditions. Certain of Aerostar's markets are subject to significant variability due to U.S. federal spending. Uncertainty and sluggish demand in these markets continued throughout fiscal 2013 and into fiscal 2014. In collaboration with Google on a pilot program to provide high-speed wireless Internet accessibility to rural, remote and underserved areas of the world, Aerostar is pioneering leading-edge applications of its high-altitude balloons. While in its early stages, this program positions Aerostar for significant growth potential, albeit with a higher risk of uncertainty.
•
Sales volumes. Current fiscal quarter net sales did not reach last year's fiscal third quarter levels, declining 8% from $26.4 million to $24.3 million. Year-to-date sales of $66.7 million were down $12.2 million, a year-over-year decrease of 15%. The primary drivers of the quarter and year-to-date sales declines were reduced demand from U.S. government agency customers, including the impact of completion of the Company's contract with the U.S. Army for the manufacture of T-11 parachutes, as well as planned declines in avionics sales. These decreases were partially offset by additional revenues for sales and services of high-altitude balloons from the initiative with Google, higher Vista net sales of support activities and SSRS products under existing contracts and increased intercompany sourcing to Applied Technology.
•
Gross margins For the nine-month period ended October 31, 2013, margins increased just over one percentage point compared to the nine-month period ended October 31, 2012 due to increased sales of higher-margin product lines and increased Vista sales.
•
Operating expenses. Third quarter operating expense was $2.0 million, or 8.3% of net sales as compared to 5.1% of net sales in the third quarter of fiscal 2013. Year-to-date operating expense as a percentage of net sales was 8.8%, up from 6.1% in the prior year period. Increased R&D spending on product development over lower sales volumes drove the percentage higher in the current year.

Corporate Expenses (administrative expenses; other (expense), net; and income taxes)
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
October 31,
2013
 
October 31,
2012
 
October 31,
2013
 
October 31,
2012
Administrative expenses
$
4,949

 
$
4,451

 
$
14,730

 
$
13,258

Administrative expenses as a % of sales
4.7
%
 
4.6
%
 
4.9
%
 
4.2
%
Other (expense), net
$
(43
)
 
$
(56
)
 
$
(460
)
 
$
(204
)
Effective tax rate
32.0
%
 
33.4
%
 
32.3
%
 
33.1
%

Administrative expenses for the three- and nine-month periods ended October 31, 2013 increased $0.5 million and $1.5 million, respectively, compared to the three- and nine-month periods ended October 31, 2012. This 11% increase over both periods is due to the Company's investments in additional finance, legal, human resources and information technology personnel to support current and future growth strategies through a strengthened corporate infrastructure. This growth has been tempered over the last three quarters and the number of employees in these roles has remained relatively consistent.

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

The effective tax rate of 32.3% for the nine-months ended October 31, 2013 was lower than the prior year comparative period effective tax rate of 33.1% due to additional R&D credits available and a higher deduction for manufacturing income in the U.S.


#17

OUTLOOK

Raven continues to become a more technology-focused Company - centered on solving the specific great challenges of hunger, security, energy independence and natural resource preservation and serving our core markets. Raven is transitioning from a company with a strong contract manufacturing orientation to one that is driven by proprietary products and services. During this evolution, management anticipates some volatility in our results. The Company anticipates near-term fluctuations across its divisions, however, management believes that Raven is very well positioned for the long term.

Aerostar, in particular, continues to be impacted by reduced demand from U.S. agency customers and its planned transition away from electronic manufacturing services for avionics customers. Aerostar has opportunities to offset reduced demand from U.S. agency customers and continues to reassign resources to support this transition and allocate capital to breakout growth drivers. Theses growth opportunities include high-altitude balloons (including Google's Project Loon), aerostat sales to customers in international markets and revenues from advanced radar systems. As a diversified company, management considers this Aerostar role a benefit, believing that Applied Technology and Engineered Films are well positioned to deliver more incremental growth, and Aerostar provides the potential for strong upside, albeit with a higher risk of uncertainty.

Management believes it will be difficult to match the growth seen in the fiscal third quarter, but opportunities exist in the fiscal fourth quarter that could fuel some year-over-year earnings growth for the quarter. Applied Technology will be driven by sales of new products and improving international market performance. Engineered Films will continue to leverage opportunity in agricultural barrier films and move forward with new film capabilities serving the Company’s construction, geomembrane and industrial segments. Aerostar will continue to experience reduced demand from Raven's U.S. government customers, but the Company has opportunities to substantially offset this by increasing Vista and other proprietary product sales.

The Company's strong balance sheet and technological positions along with future prospects in its chosen markets, give management confidence for the long term, despite potentially volatile results. While overall conditions are improving and the third quarter was strong, management does not believe the Company will report profit growth for the full fiscal year 2014. Management expects to achieve attractive returns on equity and will continue to deliver strong returns to shareholders through dividends and long-term growth. The Company also expects to return to its long-term earnings growth goals of 10 to 12% in fiscal 2015 as it executes on a current mix of promising growth drivers and mixed macro-economic conditions.

LIQUIDITY AND CAPITAL RESOURCES

The Company's balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been Raven's primary source of liquidity. Management expects that current cash, combined with the generation of positive operating cash flows, will be sufficient to fund the Company's normal operating, investing and financing activities. Sufficient borrowing capacity also exists if necessary for a large acquisition or major business expansion.

Raven's cash needs are seasonal, with working capital demands strongest in the first quarter. As a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in working capital. Cash and cash equivalents totaled $48.6 million at October 31, 2013, a decrease of $0.8 million from $49.4 million at January 31, 2013. The comparable balance one year earlier was $48.1 million.

Raven has an uncollateralized credit agreement that provides a $10.5 million line of credit and expires November 30, 2014. There is no outstanding balance under the line of credit at October 31, 2013. The line of credit is reduced by outstanding letters of credit totaling $0.9 million as of October 31, 2013.

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 $37.2 million for the first nine months of fiscal 2014 compared with $58.0 million in the first nine months of fiscal 2013. The decrease in operating cash flows is the result of lower Company earnings and an increase in cash consumed by the change in accounts receivable and inventory changes.  These decreases were partially offset by cash generated by the change in operating liabilities, primarily driven by accounts payable and income taxes payable.
  

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Changes in inventory and accounts receivable consumed $13.0 million of cash in the first nine months of fiscal 2014 compared to generating $9.9 million one year ago. The Company's inventory turnover rate remained consistent from the prior year despite the higher raw materials inventory levels (trailing 12-month inventory turn of 5.3X in both fiscal 2014 and fiscal 2013). Cash collections continue to be efficient despite the increase in trailing 12 months days sales outstanding of 51 days at October 31, 2013 compared to 49 days at October 31, 2012.

Investing Activities
Cash used in investing activities totaled $24.5 million in the first nine months of fiscal 2014 compared to $23.0 million in the first nine months of fiscal 2013. Year-to-date capital spending consisted primarily of expenditures to expand Engineered Films' manufacturing capacity, facility expansion for Aerostar and renovation of the Company's headquarters.

The Company continued its commitment to investment in its business for long-term growth. In addition, management will evaluate strategic acquisitions that result in expanded capabilities and solidify competitive advantages. Management anticipates fiscal 2014 capital spending of approximately $30 million.

Financing Activities
Cash used in financing activities was $13.3 million for the nine months ended October 31, 2013 compared to $12.8 million one year ago. Dividends of $13.1 million, or 36.0 cents per share, were paid during the current year compared to $11.4 million, or 31.5 cents per share, in the prior year. During the nine months ended October 31, 2013 and October 31, 2012, the Company made payments of $0.4 million and $1.9 million, respectively, on acquisition-related contingent liabilities.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

There have been no material changes since the fiscal year ended January 31, 2013.

ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted
During the nine months ended October 31, 2013 the following accounting pronouncements were adopted or effective that are of significance, or potential significance, to the Company.

In February 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI)" (ASU No. 2013-02). ASU No. 2013-02 requires that an entity present, either on the face of the statement where net income is reported or in the notes, the effect of significant reclassifications out of AOCI to net income when GAAP requires that the amount be reclassified in its entirety to net income. For amounts not required to be entirely reclassified to net income, ASU No. 2013-02 requires the cross-referencing of these amounts to other disclosures that provide detail about these amounts. This guidance, required to be applied prospectively, was effective for the Company on February 1, 2013. The adoption of this guidance had no effect on the Company's consolidated financial position, results of operations or cash flows as it is disclosure-only in nature.

Pending Accounting Standards
At October 31, 2013 there are no accounting pronouncements pending that are of significance, or potential significance, to the Company.


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FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans” and similar expressions are intended to identify forward-looking statements. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although management believes that the expectations reflected in forward-looking statements are based on reasonable assumptions, there is no assurance that these assumptions are correct or that these expectations will be achieved. Assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions and commodity prices, which could affect sales and profitability in some of the Company’s primary markets, such as agriculture, construction, and oil and gas drilling; or changes in competition, raw material availability, technology or relationships with the Company’s largest customers, risks and uncertainties relating to development of new technologies to satisfy customer requirements, possible development of competitive technologies, ability to scale production of new products without negatively impacting quality and cost, and ability to finance investment and working capital needs for new development projects, as well as other risks described in the Company's 10-K for the fiscal year ended January 31, 2013 and the 10-Q for the period ended October 31, 2013 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.

ITEM 3.
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 outstanding as of October 31, 2013. 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 "Other (expense), net" in the Consolidated Statements of Income and Comprehensive Income. Foreign currency fluctuations had no material effect on the Company's financial condition, results of operations or cash flows.

ITEM 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the Exchange Act)) are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure.

As of October 31, 2013, the end of the period covered by this report, management evaluated the effectiveness of the Company's disclosure controls and procedures as of such date. Based on their evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of October 31, 2013.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended October 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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RAVEN INDUSTRIES, INC.
PART II — OTHER INFORMATION

Item 1. Legal Proceedings:
The Company is involved as a defendant in lawsuits, claims or disputes arising in the normal course of 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 1A. Risk Factors: Information on the Company's risk factors is set forth in Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended January 31, 2013. In addition, the Company recognizes potential risks of growth including uncertainties relating to development of new technologies to satisfy customer requirements, possible development of competitive technologies, ability to scale production of new products without negatively impacting quality and cost, and ability to finance investment and working capital needs for new development projects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None

Item 3. Defaults Upon Senior Securities: None

Item 4. Mine Safety Disclosures: None

Item 5. Other Information: None

Item 6. Exhibits:

Exhibit
Number
 
Description
 
 
 
31.1

 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2

 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1

 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2

 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS

 
XBRL Instance Document
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 

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SIGNATURES
Pursuant to the requirements 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.
 
 
 
 
 
/s/ Thomas Iacarella
 
 
Thomas Iacarella 
 
 
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 
 
Date: December 3, 2013



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