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RAVN > SEC Filings for RAVN > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for RAVEN INDUSTRIES INC


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to enhance overall financial disclosure with commentary on the operating results, liquidity, capital resources and financial condition of Raven Industries, Inc. (the Company or Raven). This commentary 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. The most significant risks and uncertainties impacting the operating performance and financial condition of the Company are discussed in Item 1A., Risk Factors, of this Annual Report on Form 10-K.

This discussion should be read in conjunction with Raven's Consolidated Financial Statements and notes thereto in Item 8 of this Form 10-K.

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

• Accounting Pronouncements

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, or divisions, that are also its 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.

Effective June 1, 2012, the Company realigned the assets and team members of its Electronic Systems Division and deployed them into the Company's Aerostar and Applied Technology Divisions. The realigned divisions will better align the Company's corporate structure with its mission and long-term growth strategies. Electronic Systems net sales of electronic manufacturing assemblies were realigned to Aerostar and the remaining proprietary products, after adjustments to intersegment eliminations, to Applied Technology. The Company retrospectively adjusted its segment information for all periods presented to reflect this change in segment reporting. These adjustments are reflected in the following discussion of segment results for comparison to prior year results. 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.

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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.

This 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.

The following discussion highlights the consolidated operating results. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.

                                                                For the years ended January 31,
dollars in thousands, except                                      %                                  %
per-share data                                2013             change             2012            change        2011
Results of Operations
Net sales                               $      406,175           6 %        $      381,511           21 %    $ 314,708
Gross margins (a)                                 31.4 %                              30.5 %                      29.1 %
Operating income                        $       77,692           3 %        $       75,641           26 %    $  60,203
Operating margins (a)                             19.1 %                              19.8 %                      19.1 %
Net income attributable to Raven
Industries, Inc.                        $       52,545           4 %        $       50,569           25 %    $  40,537
Diluted income per share (b)            $         1.44           4 %        $         1.39           24 %    $    1.12

Cash Flow and Payments to
Shareholders
Cash flow from operating activities     $       76,456                      $       43,831                   $  42,085
Cash outflow for capital
expenditures                            $       29,675                      $       29,015                   $  13,972
Cash dividends                          $       15,244                      $       13,025                   $  34,095

Performance Measures
Return on net sales (c)                           12.9 %                              13.3 %                      12.9 %
Return on average assets (d)                      20.3 %                              23.3 %                      22.6 %
Return on beginning equity (e)                    29.1 %                              35.8 %                      30.4 %

(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) Diluted income per share reflects a two-for-one stock split effective July 25, 2012.
(c) Net income divided by sales.
(d) Net income divided by average assets.
(e) Net income divided by beginning equity.

Results of Operations - Fiscal 2013 compared to Fiscal 2012 The Company again posted record sales, operating income, net income and diluted earnings per share for fiscal 2013. These record levels resulted in large part from continued higher demand for Applied Technology's products as well as increased demand in Engineered Films' geomembrane and agriculture markets. With additional support from the demand for pit liners in the energy market through the first half of fiscal 2013, Engineered Films' net sales increased 6% as compared to fiscal 2012. Strong original equipment manufacturer (OEM) demand, international growth and new product sales fueled an 18% increase in net sales for Applied Technology in fiscal 2013 as compared to fiscal 2012. Aerostar's net sales decreased 5% resulting from a lack of tethered aerostat deliveries; however, in spite of this decrease, the Company's net sales increased 6% compared to the prior fiscal year.

Fiscal 2013 operating income increased 3% from fiscal 2012 primarily due to sales growth partially offset by higher investment in research and development (R&D), selling and administrative expenses. Applied Technology increased its operating income

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by 20% due to higher sales and associated operating leverage. Engineered Films' operating income growth of 17% reflects higher sales and increased operating efficiencies and favorable price versus material cost spread seen in the first half of this fiscal year. Aerostar posted a decline of 44% from the prior year operating income due primarily to lower sales.

Results of Operations - Fiscal 2012 compared to Fiscal 2011 Fiscal 2012 net sales rose 21% to $381.5 million and diluted earnings per share increased 24% to $1.39 per share as a result of sales growth in all operating segments: Applied Technology (35%), Engineered Films (26%) and Aerostar (3%). These levels resulted in large part from higher demand for Applied Technology's products due to a strong agriculture market and international expansion. In addition, high crude oil prices resulted in increased drilling, which drove growth of pit liner sales in the energy market for Engineered Films. Aerostar also posted sales increases primarily due to higher T-11 parachute and spare parts deliveries. Fiscal 2012 operating income increased 26% from fiscal 2011 primarily due to these increases in net sales and improved margins in Applied Technology.

Cash Flow and Payments to Shareholders
The Company continues to generate strong operating cash flows and maintain a strong capital base as reflected in the $49.4 million cash balance as of January 31, 2013. Capital expenditures totaled $29.7 million in fiscal 2013 compared to $29.0 million in fiscal 2012. Capital spending consisted primarily of expenditures related to increased manufacturing capacity and a reclaim facility in Engineered Films, Applied Technology and Aerostar's investments in future growth, including product development, facilities and equipment along with renovation of the Company's downtown Sioux Falls corporate headquarters.

During fiscal 2013, $15.2 million was returned to shareholders though quarterly dividends. In the first quarter of fiscal 2013, the quarterly dividend was raised from 9 cents per share to 10.5 cents per share, representing the 26th consecutive annual increase in the dividend (excluding special dividends). During fiscal 2012, $13.0 million was returned to shareholders through quarterly dividends.

Performance Measures
The Company continues to generate strong returns on net sales, average assets and beginning equity, which are important gauges of Raven's ability to efficiently produce profits. Raven generated a 12.9% return on sales in fiscal 2013 as the Company continues to capitalize on competitive advantages in niche markets.

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.
Financial highlights for the fiscal years ended January 31,
dollars in thousands          2013         % change         2012          % change         2011
Net sales                 $  171,778           18 %     $  145,261            35 %     $  107,910
Gross profit                  80,853           21 %         66,913            41 %         47,455
Gross margins                   47.1 %                        46.1 %                         44.0 %
Operating expense         $   21,263           24 %     $   17,163            20 %     $   14,258
Operating expense as %
of sales                        12.4 %                        11.8 %                         13.2 %
Operating income          $   59,590           20 %     $   49,750            50 %     $   33,197
Operating margins               34.7 %                        34.2 %                         30.8 %

Net sales increased $26.5 million, or 18%, to $171.8 million and operating income of $59.6 million was up $9.8 million, or 20%, for fiscal 2013 compared to fiscal 2012.

Fiscal 2013 fourth quarter net sales grew $5.9 million, or 18%, to $38.4 million and operating income of $12.3 million rose $3.5 million, or 40%, compared to fourth quarter fiscal 2012.

A number of factors contributed to the strong full-year and fourth quarter comparative results:

• Market conditions. Global market fundamentals were healthy as population and income growth in emerging economies have increased demand for food. The drought domestically has created some uncertainty in the marketplace, but overall, this has been substantially offset by higher commodity prices. The Company continues to cultivate and deepen

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relationships with key OEM partners, which expands market share and extends Raven's technology to a broader range of customers.
• Sales volume and new products. The favorable net sales comparisons for the fourth quarter and fiscal 2013 results reflect strong sales growth across the majority of the division's product offerings, including application controls, guidance and steering products, boom controls and injection products. Introduction of new products to the market, a staple in Applied Technology's continued growth, generated sales of about $21 million in fiscal 2013.

• International sales. Net sales outside the U.S. accounted for 25% of segment sales in fiscal 2013 compared to 23% for fiscal 2012. International sales increased $9.0 million, or 27%, to $42.4 million in fiscal 2013 compared to fiscal 2012. Products delivered to Canada, South America, Eastern Europe and South Africa generated the majority of this growth. For the fourth quarter, international sales totaled $7.5 million, an increase of 55% from the prior year three-month period.

• Gross margins. Gross margins improved from 46.1% in fiscal 2012 to 47.1% in fiscal 2013 due to higher sales volume and operating leverage.

• Operating expenses. Fiscal 2013 operating expenses were 12.4% of net sales compared to 11.8% for the prior year. The increase is attributable to Applied Technology's commitment to spending on product development to drive OEM demand and continued expansion into domestic and international markets.

For fiscal 2012, net sales increased $37.4 million, or 35%, to $145.3 million and operating income was up $16.6 million, or 50%, to $49.8 million compared to fiscal 2011.

Several factors contributed to the strong comparative results for fiscal 2012 as compared to fiscal 2011:

• Market conditions. Global market fundamentals were healthy as population and income growth in emerging economies increased demand for food, while natural disasters and adverse weather conditions restricted supplies. These factors resulted in higher crop prices and wider acceptance of precision agriculture as a sound investment for maximizing yields and controlling input costs.

• Sales volume and selling prices. The increase in net sales was driven by higher sales volume, as selling prices reflected only a modest increase year-over-year. The favorable year-over-year comparisons reflected strong sales growth across the majority of the division's product offerings, including application controls (i.e. control systems, flow meters, valves), field computers, guidance and steering products and boom controls.

• International sales. Net sales outside the U.S. accounted for 23% of segment sales in fiscal 2012 compared to 20% for fiscal 2011. International sales of $33.4 million in fiscal 2012 increased $11.8 million, or 55%, year-over-year as improved farm fundamentals drove strong overall demand in Brazil, and to a lesser extent, Eastern Europe, Canada, South Africa and Australia. New customers also contributed to the international sales growth, reflecting the segment's investment to expand its geographical presence.

• Gross margins. Gross margins improved to 46.1% in fiscal 2012 from 44.0% in fiscal 2011 due to higher sales volume and operating leverage.

• Operating expenses. Operating expenses were 11.8% of net sales in fiscal 2012 compared to 13.2% for the prior year. Although spending for R&D and business development efforts increased expenses $2.9 million compared to the prior year, such spending declined as a percentage of net sales, due to the significant growth in net sales.

Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for
industrial, energy, construction, geomembrane and agricultural applications.
Financial highlights for the fiscal years ended January 31,
dollars in thousands        2013          % change         2012          % change         2011
Net sales                $ 141,976             6 %      $ 133,481            26 %      $ 105,838
Gross profit                30,726            18 %         26,090            15 %         22,708
Gross margins                 21.6 %                         19.5 %                         21.5 %
Operating expenses       $   5,611            22 %      $   4,589            30 %      $   3,537
Operating expenses
as % of sales                  4.0 %                          3.4 %                          3.3 %
Operating income         $  25,115            17 %      $  21,501            10 %      $  19,622   (a)
Operating margins             17.7 %                         16.1 %                         18.5 %


(a) Includes a $451 pre-tax gain on the disposition of assets.

Net sales increased $8.5 million, or 6%, to $142.0 million while operating income was up $3.6 million, or 17%, to $25.1 million for fiscal 2013 compared to fiscal 2012.

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These year-over-year changes were driven primarily by the following factors:

• Market conditions. Economic growth in emerging markets continues to support high oil prices, though declining oil prices beginning in the second half of fiscal 2013 have decreased demand for pit liners in our energy market. Environmental and water conservation projects have increased demand for the division's containment liners in the geomembrane market.

• Sales volume and selling prices. Sales growth for fiscal 2013 was predominately driven by the increased sales into the geomembrane and agriculture markets. Geomembrane market sales have increased $6.3 million, or 43% year-over-year, and included the completion of a significant geomembrane reservoir project in Ohio in the first half of fiscal 2013. Sales of VaporSafeฎ fumigation film and FeedFresh™ silage covers accounted for the most of the $4.8 million year-over-year increase in the agriculture market. Energy market demand has softened but sales in this market held at solid levels for fiscal 2013. Overall, selling prices increased 3-5% during fiscal 2013 and sales volume, as measured by pounds shipped, was up 3% year-over-year.

• Gross margins. Fiscal 2013 gross margins increased two percentage points, as compared to the prior year, due to improved operating efficiencies, positive operating leverage and favorable price versus material spread seen in the first half of the year. Material cost as a percentage of sales was 62% for the year ended January 31, 2013 compared with 65% for the prior year.

• Operating expenses. Fiscal 2013 operating expenses as a percentage of net sales increased to 4.0%, compared to 3.4% in the prior year. The increase was attributable to higher R&D spending as the division continues to expand its product development efforts, such as its recently announced Vapor Blockฎ Spec 3 Showcase, a select-under-concrete-slab barrier film series.

Fiscal 2013 fourth quarter net sales declined $5.2 million, or 14%, to $30.8 million and operating income of $4.4 million was $2.1 million, or 33%, lower than the prior year fourth quarter.

Several factors contributed to the weaker fourth quarter comparative results:

• Sales volume and selling price. Fourth quarter fiscal 2013 sales declined from the prior year fourth quarter due to lower volume. Sales volume, as measured by pounds shipped, was down 15%, with the largest decline in the energy market.

• Gross margin. Gross margins decreased in the fourth quarter of fiscal 2013 to 18.2% compared to 22.1% in the prior year fourth quarter. The decrease in the margin was due to lower sales and unfavorable material cost spread.

For fiscal 2012, net sales increased $27.6 million, or 26%, to $133.5 million while operating income was up $1.9 million, or 10%, to $21.5 million compared to fiscal 2011.

Fiscal 2012 results were primarily driven by the following factors:

• Market conditions. Economic growth in emerging markets continued to support higher oil prices, and in turn, increased drilling activity and demand for pit liners in the energy market.

• Sales volume and selling prices. Sales growth for fiscal 2012 was predominately driven by the increased demand for pit liners utilized in oil and gas exploration activity. Environmental and water conservation projects increased the demand for geomembrane containment liners and covers during fiscal 2012. New product sales of FeedFresh™ and fumigation films contributed to the year-over-year sales increase in the agriculture market. Selling prices increased approximately 10% during fiscal 2012, reflecting higher material costs as compared with fiscal 2011. Sales volume, as measured by pounds shipped, was up 12% year-over-year.

• Gross margins. Full-year gross margins declined two percentage points, despite the 26% sales growth. The lower gross margin was attributable to higher resin costs that were not fully offset by increased selling prices in the first nine months of the fiscal 2012.

• Operating expenses. Fiscal 2012 operating expenses as a percentage of net sales increased slightly to 3.4%, compared to 3.3% in the prior year, excluding a $0.5 million gain on disposition of assets. The increase in selling expense of $0.4 million (13%) lagged the 26% increase in sales; however, a year-over-year increase in R&D spending of $0.7 million contributed to the slight increase in operating expenses as a percentage of sales. Higher R&D spending resulted from expanding product development efforts.

Aerostar
Aerostar designs and manufactures surveillance technology, electronic and specialty-sewn and sealed products including tethered aerostats, high-altitude scientific balloons and airships, protective wear, parachutes, military decoys and marine navigation equipment. Aerostar also provides electronics manufacturing services (EMS) for commercial customers with a focus on high-

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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.

Financial highlights for the fiscal years ended January 31,

dollars in thousands          2013         % change          2012         % change          2011
Net sales                 $  102,051           (5 )%     $  107,811            3 %      $  104,384
Gross profit                  16,155          (31 )%         23,378           10 %          21,307
Gross margins                   15.8 %                         21.7 %                         20.4 %
Operating expenses        $    5,814           15 %      $    5,070           24 %      $    4,098
Operating expenses as %
of sales                         5.7 %                          4.7 %                          3.9 %
Operating income          $   10,341          (44 )%     $   18,308            6 %      $   17,209
Operating margins               10.1 %                         17.0 %                         16.5 %

Net sales were unable to reach last year's results of $107.8 million, declining 5% to $102.1 million. Operating income of $10.3 million was down $8.0 million, or 44%, compared to fiscal 2012.

For the fourth quarter, net sales fell $6.5 million to $23.2 million from $29.7 million in the comparative period of 2012. Operating income declined $2.6 million to $2.8 million compared to fiscal 2012 fourth quarter.

Fiscal 2013 and fourth quarter comparative results were primarily attributable to the following:

• Market conditions. Throughout fiscal 2013, Aerostar faced continued uncertainty and sluggish demand. Certain of this segment's markets are subject to significant variability due to federal spending. Changes in EMS revenues, however, were primarily due to expected decreases in avionics sales.

• Sales volumes. Net sales for fiscal 2013 reflect a full year of Vista sales, $14.4 million compared to $0.6 million in fiscal 2012, and increased intercompany sourcing to Applied Technology, which added $4.1 million. These positives were not enough to offset a decrease in tethered aerostat deliveries and electronics manufacturing sales for the year. Vista's fourth quarter net sales of $4.8 million helped moderate a $4.8 million decline in relatively high-margin aerostat sales, as well as lower electronics manufacturing revenues, for the three-month period.

• Gross margins. Gross margins declined from 21.7% in fiscal 2012 to 15.8% for fiscal 2013. The change in product mix negatively impacted gross margins for both the fiscal year and quarter ended January 31, 2013 as last year's margins were favorably impacted by higher-margin aerostat sales. Aerostat sales accounted for roughly 17% of net sales in fiscal 2012 compared to approximately 2% in fiscal 2013.

• Operating expenses. Operating expenses of $5.8 million or 5.7% of sales increased $0.7 million from $5.1 million or 4.7% of sales. Higher operating expenses primarily reflect increased investment in R&D to support next generation aerostat and Vista radar technology.

For fiscal 2012, net sales increased $3.4 million, or 3%, to $107.8 million and operating income grew $1.1 million, or 6%, to $18.3 million as compared to fiscal 2011.

Fiscal 2012 results were driven by the following:

• Sales volumes. Fiscal 2012 net sales increased $3.4 million from the prior year, primarily due to higher T-11 parachute and spare parts deliveries, additional protective wear sales and additional intercompany sourcing assembly to the Applied Technology Division, partially offset by a decrease in tethered aerostat deliveries.

• Volatility in aerostat deliveries. The Company continued to see volatility in the delivery of aerostats which impact comparative results. Aerostat sales in fiscal 2012 were $7.3 million in the first quarter; $3.7 million in the second quarter; $1.6 million in the third quarter and $5.1 million in the fourth quarter.

• Gross margin improvement. Gross margins improved to 21.7% compared to 20.4% in the prior year. Gross margin expansion on T-11 parachutes resulted from manufacturing efficiencies and higher sales volume but was partially offset by a change in product mix. Aerostat sales, which carry a relatively higher margin, accounted for approximately 16% of net sales in fiscal 2012 compared to 21% in fiscal 2011.

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• Operating expenses. Operating expenses of $5.1 million, or 4.7% of sales, increased $1.0 million from $4.1 million, or 3.9% of sales, primarily as a result of higher investment in research and development to support next generation aerostat technology and the development of lighter but stronger materials, along with higher selling and business development expense to expand the tethered aerostat business.

Corporate Expenses (administrative expenses; other (expense), net; and income . . .

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