UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-07982

 

RAVEN INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

South Dakota (State of incorporation) 205 E. 6th Street, P.O. Box 5107, Sioux Falls, SD (Address of principal executive offices)		46-0246171 (IRS Employer Identification No.) 57117- 5107 (zip code)

Registrant’s telephone number including area code (605) 336-2750

Title of Each Class:		Name of Each Exchange on which Registered
Common Stock, $1 par value		The NASDAQ Stock Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past ninety days. þ Yes o No

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates at July 31, 2010 was approximately $570,364,695. The aggregate market value was computed by reference to the closing price as reported on the NASDAQ Global Select Market, $35.03, on July 31, 2010, which was as of the last business day of the registrant’s most recently completed second fiscal quarter. The number of shares outstanding on March 25, 2011 was 18,075,906.

The definitive proxy statement relating to the registrant’s Annual Meeting of Shareholders, to be held May 24, 2011, is incorporated by reference into Part III to the extent described therein.

 

 

PART I
Item 1.		BUSINESS			3
Item 1A.		RISK FACTORS			6
Item 1B.		UNRESOLVED STAFF COMMENTS			9
Item 2.		PROPERTIES			9
Item 3.		LEGAL PROCEEDINGS			9
Item 4.		REMOVED AND RESERVED			9
PART II
Item 5.		MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES			10
		Quarterly Information (Unaudited)			10
		Stock Performance			11
Item 6.		SELECTED FINANCIAL DATA			12
		Six-year Financial Summary			12
		Business Segments			13
Item 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			14
		Executive Summary			14
		Results of Operations — Segment Analysis			17
		Outlook			21
		Liquidity and Capital Resources			22
		Off-Balance Sheet Arrangements and Contractual Obligations			23
		Critical Accounting Estimates			23
		New Accounting Standards			25
Item 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			25
Item 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			26
		Management’s Report on Internal Control Over Financial Reporting			27
		Report of Independent Registered Public Accounting Firm			28
		Consolidated Balance Sheets			29
		Consolidated Statements of Income			30
		Consolidated Statements of Shareholders’ Equity and Comprehensive Income			31
		Consolidated Statements of Cash Flows			32
		Notes to Consolidated Financial Statements			33
Item 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			46
Item 9A.		CONTROLS AND PROCEDURES			46
Item 9B.		OTHER INFORMATION			46
PART III
Item 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			47
Item 11.		EXECUTIVE COMPENSATION			47
Item 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS			47
Item 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			47
Item 14		PRINCIPAL ACCOUNTING FEES AND SERVICES			47
PART IV
Item 15.		EXHIBITS, FINANCIAL STATEMENT SCHEDULE			48
INDEX TO EXHIBITS					49
SIGNATURES					50
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE					51
SCHEDULE II					52
EX-10.G
EX-10.P
EX-21
EX-23
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

ITEM 1.		BUSINESS

Raven Industries, Inc. was incorporated in February 1956 under the laws of the State of South Dakota and began operations later that same year. Raven is an industrial manufacturer providing a variety of products. The company markets its products around the world and has its principal operations in the United States of America. Raven began operations as a manufacturer of high-altitude research balloons before diversifying into the industrial, agricultural, construction and military/aerospace markets. The company employs approximately 1,100 people on active status and is headquartered at 205 E. Sixth Street, Sioux Falls, SD 57104 — telephone (605) 336-2750. The company’s Internet address is http://www.ravenind.com and its common stock trades on the NASDAQ Global Select Market under the symbol RAVN. The company has adopted a Code of Conduct applicable to all officers, directors, and employees, which is available on the website. Information on the company’s website is not part of this filing.

All reports (including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K) and proxy and information statements filed with the Securities and Exchange Commission (SEC) are available through a link from the company’s website to the SEC website. All such information is available as soon as reasonably practicable after it has been electronically filed. Filings can also be obtained free of charge by contacting the company, the SEC’s Public Reference Room at 100 F Street N.E., Washington, DC 20549, through the SEC’s website at http://www.sec.gov, or by calling the SEC at 1-800-SEC-0330.

The company has four business segments: Applied Technology Division, Engineered Films Division, Aerostar Division and Electronic Systems Division. Many of the past and present product lines are an extension of technology and production methods developed in the original balloon business. Product lines have been grouped in these segments based on common technologies, production methods and raw materials; however, more than one business segment may serve each of the product markets identified above.

Business segment financial information is found on the following pages:

	13			“Business Segments”
	17			“Results of Operations — Segment Analysis”
	43			“Note 13. Business Segments and Major Customer Information”

BUSINESS SEGMENTS

Applied Technology

Products in this segment are electronic and Global Positioning System (GPS) devices. They are used primarily on agricultural sprayers for precision farming applications. The company has developed products for field location control, chemical injection and automated steering. In the fourth quarter of fiscal 2010, Raven invested in Site-Specific Technology Development Group, Inc., a software company, and purchased the assets of Ranchview, Inc., a developer of GPS signal correction and wireless internet connectivity via cell phone networks. These investments are expected to position Applied Technology with tools to improve grower decision-making along with the hardware to execute these decisions in the field.

A field sales force sells the agricultural control products in this segment to original equipment manufacturers (OEMs) and independent third-party distributors. The segment also markets using precision agriculture representatives on location in key geographic areas, including Canada, Europe, Ukraine and Australia. The company’s competitive advantage in this segment is product reliability, ease of use, product availability and service after the sale.

Engineered Films

This segment produces rugged reinforced plastic sheeting for industrial, construction and agricultural applications.

The company’s sales force sells plastic sheeting to independent third-party distributors in each of the various markets it serves. The company extrudes a significant portion of the film converted for its commercial products and believes it is one of the largest sheeting converters in the United States. Engineered Films believes its ability to both extrude and convert films allows it to provide a more customized solution to customer needs. A number of suppliers of sheeting compete with Raven on both price and product availability. Engineered Films is the company’s most capital-intensive business segment, requiring regular investments in new extrusion capacity along with printers and conversion equipment. This segment’s capital expenditures were $8.5 million in fiscal 2011, $1.5 million in fiscal 2010 and $3.1 million in fiscal 2009.

Aerostar

Aerostar sells high-altitude and tethered aerostats for government and commercial research. It produces military parachutes, uniforms and protective wear for U.S. government agencies and as a subcontractor. It also manufactures other sewn and sealed products on a contract basis.

Sales are made in response to competitive bid requests. High-altitude research balloons are sold directly to government agencies (usually funded by the National Aeronautics and Space Administration) or commercial users. Aerostar is the only balloon supplier for high-altitude research in the United States.

Electronic Systems

The company has focused this segment’s capabilities in electronics manufacturing services (EMS) for commercial customers with a focus on high-mix, low-volume production. Assemblies manufactured by the Electronic Systems segment include avionics, secure communication, environmental controls and other products where high quality is critical.

EMS sales are made in response to competitive bid requests by customers. The level and nature of competition varies with the type of product, but the company frequently competes with a number of EMS manufacturers on any given bid request. The markets in which the company participates are highly competitive, with customers having many suppliers from which to choose.

MAJOR CUSTOMER INFORMATION

Sales in fiscal 2011, 2010 and 2009 to Goodrich Corporation, a customer of the Electronic Systems segment, accounted for 13%, 16% and 13%, respectively, of consolidated sales. While Electronic Systems expects revenue from this customer to decline, the company does not anticipate any sudden disruptions to this relationship.

SEASONAL WORKING CAPITAL REQUIREMENTS

Some seasonal demand exists in Applied Technology’s agricultural market. Applied Technology builds product in the fall for winter and spring delivery. Certain sales to agricultural customers offer spring payment terms for fall and early winter shipments. The resulting fluctuations in inventory and accounts receivable have required, and may require, seasonal short-term financing.

FINANCIAL INSTRUMENTS

The principal financial instruments that the company maintains are cash, cash equivalents, short-term investments and accounts receivable. The company manages the interest rate, credit and market risks associated with these accounts through periodic reviews of the carrying value of assets and liabilities and establishment of appropriate allowances in connection with the company policies. The company does not use off-balance sheet financing, except to enter into operating leases.

The company uses derivative financial instruments to manage foreign currency risk. The use of these financial instruments has had no material effect on consolidated results of operations, financial condition or cash flows.

RAW MATERIALS

The company obtains a wide variety of materials from several vendors. Principal materials include numerous electronic components for the Electronic Systems and Applied Technology segments, various plastic resins for the Engineered Films segment and fabrics for the Aerostar segment. The Engineered Films segment has experienced volatile resin prices over the past three years. Price increases could not always be passed on to customers due to weak demand and a competitive pricing environment. The Electronic Systems segment will experience variability in lead times for components as business cycles impact demand. However, predicting future material shortages and the related potential impact on Raven is not possible.

PATENTS

The company owns a number of patents. However, Raven does not believe that its business, as a whole, is materially dependent on any one patent or related group of patents. It believes the successful manufacture and sale of its products generally depend more upon its technical expertise, speed to market and manufacturing skills.

RESEARCH AND DEVELOPMENT

The business segments conduct ongoing research and development efforts. Most of the company’s research and development expenditures are directed toward new products in the Applied Technology and Aerostar segments. Total company research and development costs are presented on the Consolidated Statements of Income.

ENVIRONMENTAL MATTERS

Except as described below, the company believes that, in all material respects, it is in compliance with applicable federal, state and local environmental laws and regulations. Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected the company’s capital expenditures, earnings or competitive position.

In connection with the sale of substantially all of the assets of the company’s Glasstite, Inc. subsidiary in fiscal 2000, the company has agreed to assume responsibility for the investigation and remediation of any pre-October 29, 1999 environmental contamination at the company’s former Glasstite pickup-truck topper facility in Dunnell, Minnesota as required by the Minnesota Pollution Control Agency (MPCA) or the United States Environmental Protection Agency (EPA).

The company and the purchasers of the company’s Glasstite subsidiary conducted environmental assessments of the properties. Although these assessments continue to be evaluated by the MPCA on the basis of the data available, there is no reason to believe that any activities that might be required as a result of the findings of the assessments will have a material effect on the company’s results of operations, financial position or cash flows. The company had $58,000 accrued at January 31, 2011, its best estimate of probable costs to be incurred related to these matters.

BACKLOG

As of February 1, 2011, the company’s order backlog totaled $76.0 million. Backlog amounts as of February 1, 2010 and 2009 were $74.7 million and $80.4 million, respectively. Because the length of time between order and shipment varies considerably by business segment and customers can change delivery schedules or potentially cancel orders, the company does not believe that backlog, as of any particular date, is necessarily indicative of actual net sales for any future period.

EMPLOYEES

As of January 31, 2011, the company had 1,112 employees, 1,101 in an active status. Following is a summary of active employees by segment: Electronic Systems — 252; Applied Technology — 313; Engineered Films — 177; Aerostar — 296; Administration — 63. Management believes its employee relations are satisfactory.

EXECUTIVE OFFICERS

NAME, AGE AND POSITION		BIOGRAPHICAL DATA
Daniel A. Rykhus, 46 President and Chief Executive Officer		Mr. Rykhus became the company’s President and Chief Executive Officer in 2010. He joined Raven in 1990 as Director of World Class Manufacturing, was General Manager of the Applied Technology Division from 1998 through 2009, and served as Executive Vice President from 2004 through 2010.
Thomas Iacarella, 57 Vice President and Chief Financial Officer		Mr. Iacarella joined Raven in 1991 as Corporate Controller and has been the company’s Chief Financial Officer, Secretary and Treasurer since 1998. Prior to joining the company, he held positions with Tonka Corporation and the accounting firm now known as Ernst & Young.
David R. Bair, 54 Division Vice President and General Manager — Electronic Systems Division		Mr. Bair joined Raven in 1999 as Division Vice President and General Manager of the Electronic Systems Division.
James D. Groninger, 52 Division Vice President and General Manager — Engineered Films Division		Mr. Groninger joined Raven in 1986 and in 1995 became Manager of Glasstite, Inc. He has been Division Vice President and General Manager of the Engineered Films Division since 2004.
Barbara K. Ohme, 63 Vice President — Administration		Ms. Ohme joined Raven in 1987 as Employment Manager and has been the company’s Vice President of Administration since 2004.
Matthew T. Burkhart, 35 Division Vice President and General Manager — Applied Technology Division		Mr. Burkhart was named Division Vice President and General Manager of the Applied Technology Division on February 1, 2010. He joined Raven in 2008 as Director of Sales and became General Manager — Applied Technology Division on February 1, 2009. Prior to joining the company, he was a Branch Manager for Johnson Controls.
Lon E. Stroschein, 36 Division Vice President and General Manager — Aerostar Division		Mr. Stroschein was named Vice President and General Manager of the Aerostar Division in October 2010. He joined Raven in 2008 as International Sales Manager for Applied Technology. Prior to joining Raven, he was a bank Vice President and was a member of the executive staff for a U.S. Senator.

ITEM 1A. RISK FACTORS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans” and similar expressions are intended to identify forward-looking statements. The company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although the company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there is no assurance that such assumptions are correct or that these expectations will be achieved. Such assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions and commodity prices, which could affect certain of the company’s primary markets, such as agriculture and construction and oil and gas well drilling; or changes in competition,

raw material availability, technology or relationships with the company’s largest customers any of which could adversely impact any of the company’s product lines, as well as other risks described below. The foregoing list is not exhaustive and the company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.

RISKS RELATING TO THE COMPANY

The company operates in markets that involve significant risks, many of which are beyond the company’s control. Based on current information, the company believes that the following identifies the most significant risk factors that could affect its businesses. However, the risks and uncertainties the company faces are not limited to those discussed below. There could be other unknown or unpredictable economic, business, competitive or regulatory factors, including factors that the company currently believes to be immaterial, that could have material adverse effects on the company’s financial position, liquidity and results of operations. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

Weather conditions could affect certain of the company’s markets such as agriculture and construction.

The company’s Applied Technology Division is largely dependent on the ability of farmers and agricultural subcontractors known as custom operators to purchase agricultural equipment that includes its products. If such farmers experience adverse weather conditions resulting in poor growing conditions, or experience unfavorable crop prices or expenses, potential buyers may be less likely to purchase agricultural equipment. Accordingly, weather conditions may adversely affect sales in the Applied Technology Division.

Weather conditions can also adversely affect sales in the company’s Engineered Films Division. To the extent weather conditions curtail construction activity, sales of the segment’s plastic sheeting will likely decrease.

Price fluctuations in and shortages of raw materials could have a significant impact on the company’s ability to sustain and grow earnings.

The company’s Engineered Films Division (EFD) consumes significant amounts of plastic resin, the costs of which primarily reflect market prices for natural gas. These prices are subject to worldwide supply and demand as well as other factors beyond the control of the company. Although EFD is sometimes able to pass such price increases to its customers, significant variations in the cost of plastic resins can affect the company’s operating results from period to period. Unusual supply disruptions, such as caused by a natural disaster, could cause suppliers to invoke “force majeure” clauses in their supply agreements, causing shortages of material. Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served. If the company is not able to fully offset the effects of material availability and costs, financial results could be adversely affected.

Electronic components, used by both the Applied Technology Division and Electronic Systems Division, are sometimes in short supply, impacting our ability to meet customer demand.

If a supplier of raw materials or components were unable to deliver due to shortage or financial difficulty, any of the company’s segments could be adversely affected.

Fluctuations in commodity prices can increase our costs and decrease our sales.

Agricultural income levels are affected by agricultural commodity prices and input costs. As a result, changes in commodity prices that reduce agricultural income levels could have a negative effect on the ability of growers and their contractors to purchase the company’s precision agriculture products manufactured by its Applied Technology Division.

Exploration for oil and natural gas fluctuates with their price. Plastic sheeting manufactured and sold by our Engineered Films Division is sold as pit and pond liners to contain water used in the drilling process. Lower prices for oil and natural gas could reduce exploration activities and demand for our products. Plastic sheeting manufacture uses plastic resins which are subject to change in price as the cost of natural gas changes. Accordingly, volatility in oil and natural gas prices may negatively affect our cost of goods sold or cause us to change prices, which could adversely affect our sales and profitability.

Failure to develop and market new technologies and products could impact the company’s competitive position and have an adverse effect on the company’s financial results.

The company’s operating results in its Applied Technology and to a lesser extent, its Engineered Films and Aerostar segments, are largely dependent on the ability to renew the pipeline of new products and to bring those products to market. This ability could be adversely affected by difficulties or delays in product development such as the inability to identify viable new products, successfully complete research and development, obtain relevant regulatory approvals, obtain intellectual property protection, or

gain market acceptance of new products and services. Because of the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products the company is currently developing, or could begin to develop in the future, will achieve substantial commercial success. In addition, sales of the company’s new products could replace sales of some of its current products, offsetting the benefit of even a successful product introduction.

The company’s Electronic Systems Division is dependent on a small number of customers and faces competitive risks.

The company’s Electronic Systems Division (ESD) is dependent on a small number of customers with the top customer representing over half of ESD sales. Accordingly, the ESD segment is dependent on the continued growth, viability and financial stability of its customers, which consist of original equipment manufacturers of avionics, consumer beds and secure telecommunication equipment. Future sales are dependent on the success of the company’s customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to major customers or their products, or the failure of a major customer to pay for components or services, could have an adverse effect on the performance of ESD.

Further, ESD competes against many providers of electronics manufacturing services. Certain competitors have substantially greater resources and more geographically diversified international operations than ESD. This segment may also be at a competitive disadvantage with respect to price when compared to manufacturers with lower cost structures, particularly those with more offshore facilities located where labor and other costs are lower. The company also faces competition from the manufacturing operations of current and future customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing to electronics manufacturing services providers. Accordingly, to compete effectively, ESD must continue to provide technologically advanced manufacturing services, maintain strict quality standards, respond flexibly and rapidly to customers’ design and schedule changes and deliver products globally on a reliable basis at competitive prices. Customers may cancel their orders, change production quantities or delay production. Start-up costs and inefficiencies related to new or transferred programs can adversely affect operating results and such costs may not be recoverable if such new programs or transferred programs are cancelled.

The company’s Aerostar segment depends on the U.S. government for a significant portion of its sales, creating uncertainty in the timing of and funding for projected contracts.

A significant portion of Aerostar’s sales are to the U.S. government or U.S. government agencies as a prime or sub-contractor. Government spending has historically been cyclical. A decrease in U.S. government defense or near-space research spending or changes in spending allocation could result in one or more of the company’s programs being reduced, delayed or terminated. Reductions in the company’s existing programs, unless offset by other programs and opportunities, could adversely affect its ability to sustain and grow its future sales and earnings. The company’s U.S. government sales are funded by the federal budget, which operates on an October-to-September fiscal year. Changes in congressional schedules, negotiations for program funding levels or unforeseen world events can interrupt the funding for a program or contract. Funds for multi-year contracts can be changed in subsequent years in the appropriations process.

In addition, the U.S. government has increasingly relied on indefinite delivery, indefinite quantity (IDIQ) contracts and other procurement vehicles that are subject to a competitive bidding and funding process even after the award of the basic contract, adding an additional element of uncertainty to future funding levels. Delays in the funding process or changes in funding can impact the timing of available funds or can lead to changes in program content or termination at the government’s convenience. The loss of anticipated funding or the termination of multiple or large programs could have an adverse effect on the company’s future sales and earnings.

The company derives a portion of its revenues from foreign markets, which subjects the company to risk of changes in government policies and laws or worldwide economic conditions.

The company’s sales outside the U.S. were $25 million in fiscal 2011. The company’s financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country’s or region’s economic or political conditions; trade regulations affecting production, pricing and marketing of products; local labor conditions and regulations; reduced protection of intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions on currency exchange activities; burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced sales and reduced profitability associated with such sales.

Adverse economic conditions in the major industries the company serves may materially affect segment performance and consolidated results of operations.

The company’s results of operations are impacted by the market fundamentals of the primary industries served. Significant declines of economic activity in the agricultural, oil and gas exploration, construction, industrial, aerospace/aviation, communication, defense and other major markets served may adversely affect segment performance and consolidated results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The company maintains the following properties in connection with its operations, all of which the company owns, unless indicated otherwise:

Square

Location

Feet

Function

Business segments

Sioux Falls, SD

150,000

Corporate office; electronics manufacturing

All

131,000

Plastic sheeting manufacturing

Engineered Films

73,000

Warehouse

Engineered Films

59,000

Plastic sheeting manufacturing and sewing

Engineered Films; Aerostar

35,000

Warehouse and offices

Engineered Films; Aerostar

27,000

Training facility and manufacturing

Applied Technology

25,000

Tethered aerostat and inflatable manufacturing

Aerostar

24,000

Electronics manufacturing

Electronic Systems

*14,000

Tethered aerostat inflation and testing

Aerostar

23,000

Training and product development facility

Applied Technology

10,000

Machine shop

Applied Technology

Sulphur Springs, TX

64,000

Research balloon manufacturing

Aerostar

Huron, SD

24,000

Sewing plant

Aerostar

St. Louis, MO

24,000

Electronics manufacturing

Electronic Systems

Madison, SD

20,000

Sewing plant

Aerostar

Austin, TX

*7,000

Product development facility

Applied Technology; Aerostar

Stockholm, SK

*7,000

Warehouse

Applied Technology

Most of the company’s manufacturing plants also serve as distribution centers and contain offices for sales, engineering and manufacturing support staff. The company believes that its properties are suitable and adequate to meet existing production needs. Additionally, the productive capacity in the company’s facilities is substantially being utilized. The company plans to build a new Applied Technology manufacturing facility on land purchased in fiscal 2011. In addition, the company owns 6.95 acres of undeveloped land adjacent to the other owned property in Sioux Falls, which is available for expansion.

ITEM 3. LEGAL PROCEEDINGS

The company is responsible for investigation and remediation of environmental contamination at one of its sold facilities (see “Item 1, Business — Environmental Matters”). In addition, the company is involved as a defendant in lawsuits, claims or disputes arising in the normal course of its business. The potential costs and liability of such claims cannot be determined at this time. Management believes that any liability resulting from these claims will be substantially mitigated by insurance coverage. Accordingly, management does not believe the ultimate outcome of these matters will be significant to its results of operations, financial position or cash flows.

ITEM 4. REMOVED AND RESERVED

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Raven’s common stock is traded on the NASDAQ Global Select Market under the symbol RAVN. The following table shows quarterly financial results, quarterly high and low closing sales prices per share of Raven’s common stock as reported by NASDAQ, and dividends declared for the periods indicated:

QUARTERLY INFORMATION (UNAUDITED)

(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

																						Net Income								Common Stock								Cash
		Net				Gross				Operating				Pretax				Net				Per Share(a)								Market Price								Dividends
		Sales				Profit				Income				Income				Income				Basic				Diluted				High				Low				Per Share
FISCAL 2011
First Quarter		$	85,030			$	27,171			$	19,505			$	19,557			$	12,945			$	0.72			$	0.72			$	31.79			$	26.54			$	0.16
Second Quarter			73,174				20,389				12,623				12,529				8,353				0.46				0.46				38.18				28.66				0.16
Third Quarter			85,823				24,887				17,866				17,883				11,833				0.65				0.65				42.11				30.00				1.41	(b)
Fourth Quarter			70,681				18,982				10,209				10,313				7,406				0.41				0.41				49.59				40.01				0.16
Total Year		$	314,708			$	91,429			$	60,203			$	60,282			$	40,537			$	2.24			$	2.24			$	49.59			$	26.54			$	1.89
FISCAL 2010
First Quarter		$	65,222			$	20,428			$	14,113			$	14,114			$	9,231			$	0.51			$	0.51			$	24.65			$	15.37			$	0.13
Second Quarter			56,586				15,112				9,306				9,411				6,204				0.34				0.34				31.00				23.99				0.14
Third Quarter			60,158				16,918				11,119				11,116				7,293				0.40				0.40				32.43				24.47				0.14
Fourth Quarter			55,816				15,394				8,682				8,681				5,846				0.32				0.32				33.18				24.04				0.14
Total Year		$	237,782			$	67,852			$	43,220			$	43,322			$	28,574			$	1.58			$	1.58			$	33.18			$	15.37			$	0.55
FISCAL 2009
First Quarter		$	75,166			$	23,288			$	16,641			$	16,759			$	10,882			$	0.60			$	0.60			$	32.80			$	25.94			$	0.13
Second Quarter			69,278				17,197				10,312				10,488				6,815				0.38				0.38				39.50				29.46				0.13
Third Quarter			75,538				19,564				12,371				12,548				8,385				0.47				0.46				47.82				25.79				0.13
Fourth Quarter			59,931				13,399				7,070				7,106				4,688				0.26				0.26				33.24				20.60				1.38	(c)
Total Year		$	279,913			$	73,448			$	46,394			$	46,901			$	30,770			$	1.71			$	1.70			$	47.82			$	20.60			$	1.77

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG RAVEN INDUSTRIES, S&P 1500
INDUSTRIAL MACHINERY INDEX AND RUSSELL 2000 INDEX

Raven continues to outperform its industrial peers and the overall market in shareholder return. Investors who bought $100 of the company’s stock on January 31, 2006, held this for five years and reinvested the dividends, have seen its value increase to $174.50.

		Year Ended January 31																								5-Year
Company / Index		2006				2007				2008				2009				2010				2011				CAGR(a)
Raven Industries, Inc.		$	100.00			$	91.05			$	97.37			$	74.90			$	100.24			$	174.50				12	%
S&P 1500 Industrial Machinery			100.00				114.82				121.05				67.90				92.53				124.67				5	%
Russell 2000			100.00				110.51				99.70				62.97				86.78				114.00				3	%

ITEM 6. SELECTED FINANCIAL DATA

SIX-YEAR FINANCIAL SUMMARY

(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

		For the years ended January 31
		2011				2010				2009				2008				2007				2006
OPERATIONS
Net sales		$	314,708			$	237,782			$	279,913			$	233,957			$	217,529			$	204,528
Gross profit			91,429				67,852				73,448				63,676				57,540				55,714
Operating income			60,203				43,220				46,394				41,145				38,302				37,284
Income before income taxes			60,282				43,322				46,901				42,224				38,835				37,494
Net income		$	40,537			$	28,574			$	30,770			$	27,802			$	25,441			$	24,262
Net income % of sales			12.9	%			12.0	%			11.0	%			11.9	%			11.7	%			11.9	%
Net income % of beginning equity			30.4	%			25.2	%			26.0	%			28.3	%			30.1	%			36.7	%
Cash dividends(a)		$	34,095			$	9,911			$	31,884			$	7,966			$	6,507			$	5,056
FINANCIAL POSITION
Current assets		$	128,181			$	117,747			$	98,073			$	100,869			$	73,219			$	71,345
Current liabilities			34,335				25,960				23,322				22,108				16,464				20,050
Working capital		$	93,846			$	91,787			$	74,751			$	78,761			$	56,755			$	51,295
Current ratio			3.73				4.54				4.21				4.56				4.45				3.56
Property, plant and equipment		$	41,522			$	33,029			$	35,880			$	35,743			$	36,264			$	25,602
Total assets			187,760				170,309				144,415				147,861				119,764				106,157
Shareholders’ equity		$	141,214			$	133,251			$	113,556			$	118,275			$	98,268			$	84,389
Long-term debt / total capitalization			0.0	%			0.0	%			0.0	%			0.0	%			0.0	%			0.0	%
Inventory turnover (COS / average inventory)			5.6				5.3				5.2				5.3				5.4				5.9
CASH FLOWS PROVIDED BY (USED IN)
Operating activities		$	42,085			$	47,643			$	39,037			$	27,151			$	26,313			$	21,189
Investing activities			(11,418	)			(13,396	)			(7,000	)			(4,433	)			(18,664	)			(11,435	)
Financing activities			(33,834	)			(9,867	)			(36,969	)			(8,270	)			(10,277	)			(6,946	)
Change in cash			(3,121	)			24,417				(5,005	)			14,489				(2,626	)			2,790
COMMON STOCK DATA
EPS — basic		$	2.24			$	1.58			$	1.71			$	1.54			$	1.41			$	1.34
EPS — diluted			2.24				1.58				1.70				1.53				1.39				1.32
Cash dividends per share(a)			1.89				0.55				1.77				0.44				0.36				0.28
Book value per share (b)			7.81				7.38				6.30				6.52				5.45				4.67
Stock price range during the year
High		$	49.59			$	33.18			$	47.82			$	45.85			$	42.70			$	33.15
Low			26.54				15.37				20.60				26.20				25.46				16.54
Close		$	47.24			$	28.58			$	21.81			$	30.02			$	28.43			$	31.60
Shares and stock units outstanding, year-end			18,089				18,051				18,027				18,130				18,044				18,072
Number of shareholders, year-end			7,456				7,767				8,268				8,700				8,992				9,263
OTHER DATA
Price / earnings ratio (c)			21.1				18.1				12.8				19.6				20.5				23.9
Average number of employees			1,036				930				1,070				930				884				845
Sales per employee		$	304			$	256			$	262			$	252			$	246			$	242
Backlog		$	75,972			$	74,718			$	80,361			$	66,628			$	44,237			$	43,619

BUSINESS SEGMENTS

(IN THOUSANDS)

		For the years ended January 31
		2011				2010				2009				2008				2007				2006
APPLIED TECHNOLOGY DIVISION
Sales		$	100,090			$	86,217			$	103,098			$	64,291			$	45,515			$	47,506
Operating income			31,135				25,722				33,884				19,102				10,111				13,586
Assets			52,669				51,029				48,881				36,938				27,629				30,047
Capital expenditures			1,769				941				2,674				1,008				577				938
Depreciation and amortization			2,238				1,677				1,383				1,125				1,142				1,085
ENGINEERED FILMS DIVISION
Sales		$	105,838			$	63,783			$	89,858			$	85,316			$	91,082			$	82,794
Operating income			19,622	(b)			10,232				10,919				17,739				23,440				19,907
Assets			46,519				35,999				35,862				43,688				41,988				33,512
Capital expenditures			8,450				1,460				3,120				4,012				13,266				7,359
Depreciation and amortization			3,452				3,707				4,303				4,046				2,887				2,436
AEROSTAR DIVISION
Sales		$	48,787			$	27,244			$	27,186			$	17,290			$	14,654			$	18,009
Operating income			9,407				5,634				4,219				1,506				707				2,133
Assets			18,140				10,462				8,744				9,941				8,161				6,837
Capital expenditures			2,190				332				383				156				812				179
Depreciation and amortization			757				398				444				499				375				359
ELECTRONIC SYSTEMS DIVISION
Sales		$	65,852			$	63,525			$	61,983			$	67,987			$	66,278			$	56,219
Operating income			9,917				8,979				5,926				10,365				10,850				8,916
Assets			23,385				21,216				26,847				25,865				25,175				20,191
Capital expenditures			609				290				1,399				1,077				1,357				1,612
Depreciation and amortization			823				939				1,159				1,237				1,086				871
INTERSEGMENT ELIMINATIONS
Sales
Engineered Films Division		$	(307	)		$	(210	)		$	(210	)		$	(533	)		$	—			$	—
Aerostar			(32	)			(1	)			(25	)			(16	)			—				—
Electronic Systems Division			(5,520	)			(2,776	)			(1,977	)			(378	)			—				—
Operating income			(94	)			60				(52	)			(100	)			—				—
Assets			(186	)			(92	)			(152	)			(100	)			—				—
REPORTABLE SEGMENTS TOTAL
Sales		$	314,708			$	237,782			$	279,913			$	233,957			$	217,529			$	204,528
Operating income			69,987	(b)			50,627				54,896				48,612				45,108				44,542
Assets			140,527				118,614				120,182				116,332				102,953				90,587
Capital expenditures			13,018				3,023				7,576				6,253				16,012				10,088
Depreciation and amortization			7,270				6,721				7,289				6,907				5,490				4,751
CORPORATE & OTHER(a)
Operating loss (from admin expenses)		$	(9,784	)		$	(7,407	)		$	(8,502	)		$	(7,467	)		$	(6,806	)		$	(7,258	)
Assets			47,233				51,695				24,233				31,529				16,811				15,570
Capital expenditures			954				279				425				382				510				270
Depreciation and amortization			361				387				469				437				395				400
TOTAL COMPANY
Sales		$	314,708			$	237,782			$	279,913			$	233,957			$	217,529			$	204,528
Operating income			60,203	(b)			43,220				46,394				41,145				38,302				37,284
Assets			187,760				170,309				144,415				147,861				119,764				106,157
Capital expenditures			13,972				3,302				8,001				6,635				16,522				10,358
Depreciation and amortization			7,631				7,108				7,758				7,344				5,885				5,151

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to enhance overall financial disclosure. It provides management’s analysis of the primary drivers of year-over-year changes in key financial statement elements, business segment results and the impact of accounting principles on the company’s financial statements.

This discussion should be read in conjunction with the company’s January 31, 2011 financial statements and the accompanying notes.

The MD&A is organized as follows:

	•		Executive Summary
	•		Results of Operations — Segment Analysis
	•		Outlook
	•		Liquidity and Capital Resources
	•		Off-balance Sheet Arrangements and Contractual Obligations
	•		Critical Accounting Estimates
	•		New Accounting Standards

EXECUTIVE SUMMARY

Raven Industries, Inc. is an industrial manufacturer providing a variety of products to customers within the industrial, agricultural, construction and military/aerospace markets, primarily in North America. The company operates in four business segments: Applied Technology, Engineered Films, Electronic Systems and Aerostar.

Management uses a number of metrics to assess the company’s performance:

	•		Consolidated net sales, gross margins, operating income, operating margins, net income and earnings per share
	•		Cash flow from operations and shareholder returns
	•		Return on sales, assets and equity
	•		Segment net sales, gross profit, gross margins, operating income and operating margins

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

		For the years ended January 31
						%								%
dollars in thousands, except per-share data		2011				change				2010				change				2009
Results of Operations
Net sales		$	314,708				32	%		$	237,782				(15	)%		$	279,913
Gross margins (a)			29.1	%							28.5	%							26.2	%
Operating income		$	60,203				39	%		$	43,220				(7	)%		$	46,394
Operating margins (a)			19.1	%							18.2	%							16.6	%
Net income		$	40,537				42	%		$	28,574				(7	)%		$	30,770
Diluted income per share		$	2.24				42	%		$	1.58				(7	)%		$	1.70
Cash Flow and Payments to Shareholders
Cash flow from operating activities		$	42,085							$	47,643							$	39,037
Cash dividends		$	34,095							$	9,911							$	31,884
Common stock repurchases			—								—								5,180
Cash returned to shareholders		$	34,095							$	9,911							$	37,064
Performance Measures
Return on net sales(b)			12.9	%							12.0	%							11.0	%
Return on average assets(c)			22.6	%							18.2	%							21.1	%
Return on beginning equity(d)			30.4	%							25.2	%							26.0	%

Results of Operations — Fiscal 2011 versus Fiscal 2010

Fiscal 2011 was the most profitable year in the company’s history as record sales and increased productivity led to record earnings per share. Sales rose 32% to $314.7 million and diluted earnings increased 42% to $2.24 per share as a result of sales growth in Applied Technology (16%), Engineered Films (66%) and Aerostar (79%).

Applied Technology benefited from strong U.S. farm fundamentals as commodity prices—corn, soybeans and other feed grains —remained above historical levels. Economic growth in major economies and economic, income and population growth in emerging markets continued to spur increased demand for food and support healthy worldwide agriculture fundamentals. Engineered Films’ primary end markets—energy, geomembrane, industrial, agriculture and construction—rebounded from prior year recessionary levels. Aerostar capitalized on strong demand from the U.S. military for persistent ground surveillance systems. Electronic Systems benefited from higher demand for avionics and increased sourcing of assemblies to Applied Technology partially offset by weaker deliveries of circuit boards for secure communication devices.

Applied Technology

Fiscal 2011 sales of $100.1 million grew $13.9 million (16%) and operating income of $31.1 million rose $5.4 million (21%). The primary drivers of the full-year results were strong sales of application controls (i.e. control systems, flow meters, valves) and steering and guidance products (i.e. assisted-steering, GPS receivers) and the highly successful first quarter launch of Slingshot™—an information platform which improves data collection, transmission, storage and analysis and provides RTK correction of GPS signals for high accuracy steering solutions.

Engineered Films

Fiscal 2011 sales of $105.8 million increased $42.1 million (66%) and operating income of $19.6 million increased $9.4 million (92%). Economic growth and expectations for continued economic growth—particularly in emerging markets—pushed oil prices to levels adequate to support an increase in drilling activity, which accelerated demand for pit liners. Additionally, sales of FeedFresh™ silage covers grew due to healthy farm conditions and broadened appreciation of the value proposition of this highly

15

engineered film. Sales of construction films (particularly in the fourth quarter) and industrial films rose as business activity rebounded from recessionary levels. Full-year operating margins improved, reflecting improved capacity utilization and productivity gains.

Aerostar

Fiscal 2011 sales of $48.8 million grew $21.5 million (79%) and operating income of $9.4 million rose $3.8 million (67%). The sales and operating income gains were driven by increased demand for tethered aerostat systems for persistent military surveillance. Full-year operating margins were down slightly year-over-year as margin gains due to tethered aerostat sales and resulting profitability were offset by start-up costs related to the T-11 Army Airborne parachute contract and higher product development and selling expenses to support the tethered aerostats business.

Electronic Systems

Fiscal 2011 sales of $65.9 million increased $2.3 million (4%) and operating income of $9.9 million grew $0.9 million (10%). Full-year results were positively impacted by avionics sales growth, despite supply chain disruptions, and increased sourcing of assemblies to Applied Technology partially offset by weaker deliveries of circuit boards for secure communication devices. Product mix had a favorable impact on full-year operating margins.

Results of Operations — Fiscal 2010 versus Fiscal 2009

The 15% decrease in net sales was the result of year-over-year sales declines in Applied Technology (16%) and Engineered Films (29%). Electronic Systems and Aerostar sales were relatively flat year-over-year. Expectations of lower farm income and economic uncertainty caused growers and custom spray applicators to defer purchases, which negatively affected substantially all of Applied Technology’s product categories. The impact of the weak economy on Engineered Films’ largest markets resulted in year-over-year declines of energy market sales (40%) and construction market sales (25%). Electronic Systems sales were up 2% year-over-year, reflecting increased deliveries of avionics and secure communication electronics to meet rising demand from government agencies and the aerospace market, which were partially offset by a smaller customer base. Aerostar sales were flat compared with last year, as increased deliveries of MC-6 Army parachutes, aerostats and research balloons were offset by decreased deliveries of protective wear.

Applied Technology operating margins contracted year-over-year, reflecting the negative impact of lower sales and operating leverage on profitability. However, disciplined margin management, operational efficiencies and higher productivity brought improved operating margins for Engineered Films, Electronic Systems and Aerostar. Consequently, the 7% year-over-year decrease in operating income was less severe than the 15% drop in sales.

Cash Flow and Payments to Shareholders

The company continues to generate strong operating cash flows and maintain a strong capital base. In the first quarter of fiscal 2011, the quarterly dividend was raised from 14 cents per share to 16 cents per share, representing the 24th consecutive annual increase in the dividend (excluding special dividends). During fiscal 2011, $34.1 million was returned to shareholders through quarterly dividends totaling $11.5 million, or 64 cents per share, and a special dividend of $22.5 million, or $1.25 per share. The special dividend was paid on September 30, 2010 in response to the company’s strong cash position and commitment to return excess cash to shareholders.

During fiscal 2010, $9.9 million was returned to shareholders through quarterly dividends. The quarterly cash dividend increased from 13 cents per share to 14 cents per share beginning in the second quarter.

Performance Measures

The company continues to generate solid returns on net sales, average assets and beginning equity, which are important gauges of Raven’s ability to efficiently produce profits. Raven generated a record 12.9% return on sales in fiscal 2011 as the company continues to capitalize on competitive advantages in niche markets.

RESULTS OF OPERATIONS — SEGMENT ANALYSIS

Applied Technology

Applied Technology provides electronic and Global Positioning System (GPS) products designed to reduce operating costs and improve yields for the agriculture market.

Financial highlights for the fiscal years ended January 31,

dollars in thousands		2011				% change				2010				% change				2009
Net sales		$	100,090				16	%		$	86,217				(16	)%		$	103,098
Gross profit			45,106				19	%			37,889				(19	)%			46,591
Gross margins			45.1	%							43.9	%							45.2	%
Operating income		$	31,135				21	%		$	25,722				(24	)%		$	33,884
Operating margins			31.1	%							29.8	%							32.9	%

Fiscal 2011 net sales of $100.1 million increased $13.9 million (16%) and operating income of $31.1 million was up $5.4 million (21%) versus fiscal 2010.

Fiscal 2011 fourth quarter net sales of $22.3 million grew $5.0 million (29%) and operating income of $5.9 million rose $1.7 million (42%).

Several factors contributed to the strong full-year and fourth quarter comparative results:

	•		Market conditions. U.S. farm fundamentals were strong as commodity prices—corn, soybeans and other feed grains— remained above historical levels. In addition, global market conditions were healthy as population and income growth in emerging economies continued to spur increased demand for food.
	•		Sales volume and selling prices. Fiscal 2011 sales growth was driven by higher volume and modest selling price increases. The growth in volume reflects solid year-over-year demand for Slingshot™, application controls and guidance and steering products.
	•		New product sales. Year-to-date new product sales reflected the success of Slingshot™—an information platform which improves data collection, transmission, storage and analysis and provides RTK correction of GPS signals for high accuracy steering solutions.
	•		International sales. Net sales outside the U.S. accounted for 21% of segment sales in fiscal 2011 versus 20% in fiscal 2010. International sales of $21.3 million rose $4.2 million (25%) year-over-year led by strong Slingshot™ demand in Canada. Economic growth and strong farm fundamentals in Argentina and Brazil drove strong overall demand in South America. This growth was partially offset by a decrease in Australian sales due to weak market conditions.
	•		Gross Margins. Gross margins of 45.1% in fiscal 2011 rose from 43.9% in fiscal 2010 due to the positive effect of higher sales and strong operating leverage on profitability.
	•		Operating expenses. Full-year operating expenses decreased from 14.1% of sales in fiscal 2010 to 14.0% in fiscal 2011. Strong sales and growth opportunities drove a $1.1 million (16%) increase in selling expenses and research and development expenses increased $0.7 million (14%) to support product development and strategic initiatives.

Fiscal 2010 net sales of $86.2 million decreased $16.9 million (16%) and operating income of $25.7 million was down $8.2 million (24%) versus fiscal 2009. Lower sales and operating income were due primarily to a decrease in sales volume partially offset by modest selling price increases.

A number of factors contributed to the drop in full-year comparative results:

	•		Economic uncertainty. The government’s calendar 2009 farm income forecast was significantly lower than 2008 actual levels. Farm production costs declined from prior-year levels; however, they were outpaced by the decline in crop prices. Expectations of lower farm income and economic uncertainty led growers and custom spray applicators to defer purchases. These factors had a negative impact on substantially all of the segment’s product categories.
	•		New product sales. Fiscal 2010 new product sales decreased from one year earlier due to the highly successful fiscal 2009 launch of innovative field computers.
	•		International sales. International sales of $17.1 million fell $1.7 million (9%) year-over-year. Net sales outside the U.S. accounted for 20% of segment sales in fiscal 2010 versus 18% in fiscal 2009. Declines in some markets were partially offset by expansion into regions not previously served.
	•		Negative operating leverage. Gross margins of 43.9% in fiscal 2010 fell from 45.2% in fiscal 2009 reflecting the negative

			impact of falling sales and operating leverage on profitability.
	•		Operating expenses. Full-year operating expenses increased to 14.1% of sales in fiscal 2010 from 12.3% in fiscal 2009. Selling expenses decreased $0.5 million (7%) and lagged the drop in sales. Research and development expenses were flat year-over-year.

Engineered Films

Engineered Films produces rugged reinforced plastic sheeting for industrial, construction, geomembrane and agricultural applications.

Financial highlights for the fiscal years ended January 31,

dollars in thousands		2011				% change				2010				% change				2009
Net sales		$	105,838				66	%		$	63,783				(29	)%		$	89,858
Gross profit			22,708				75	%			13,013				(10	)%			14,502
Gross margins			21.5	%							20.4	%							16.1	%
Operating income		$	19,622	(a)			92	%		$	10,232				(6	)%		$	10,919
Operating margins			18.5	%							16.0	%							12.2	%

Fiscal 2011 net sales of $105.8 million increased $42.1 million (66%) while operating income of $19.6 million was up $9.4 million (92%) versus fiscal 2010.

Fiscal 2011 fourth quarter net sales of $24.3 million grew $7.6 million (45%) and operating income of $3.0 million rose $0.6 million (27%).

Several factors contributed to the strong full-year and fourth quarter comparative results:

	•		Improved market conditions. Business activity and confidence rose as credit markets improved and asset values stabilized. Crude oil prices rose to levels adequate to support increased drilling activity and strengthened energy market demand for pit liners. Similarly, as credit began flowing and economic uncertainty diminished, the construction and agriculture markets rose from recessionary levels.
	•		Sales volume and selling prices. Input cost increases drove a 13% increase in selling prices. Sales volume, as measured by pounds shipped, increased over 50%, as Engineered Films’ largest markets—energy and construction—rebounded from prior year depressed levels. Recovery of crude oil prices from their lows in early calendar 2009 drove additional oil and gas drilling activity and increased demand for pit liners as sales to the energy market more than doubled. Sales of industrial and construction films rose double digits. Deliveries of agriculture films rose more than 60%. Sales of FeedFresh™ silage covers gained traction due to healthy farm conditions and broadened appreciation of the value-added benefits of this highly engineered film. Grain cover sales improved year-over-year due to strong yields and a short harvest cycle.
	•		Capacity Utilization. Full-year operating margins expanded from 16.0% to 18.5% as a result of improved capacity utilization. Fourth quarter profit margins fell from 14.4% to 12.5% as a result of less favorable leverage and increased purchases of outside materials due to capacity constraints caused by planned maintenance.
	•		Operating expenses. Full-year operating expenses were 3.3% of sales in fiscal 2011 versus 4.4% in fiscal 2010. The increase in selling expenses of $0.7 million (30%) lagged the 66% increase in sales. Research and development expenses were flat year-over-year.

Fiscal 2010 net sales of $63.8 million decreased $26.1 million (29%) while operating income of $10.2 million was off $0.7 million (6%) versus fiscal 2009. Lower sales and operating income reflected falling sales volume and selling prices.

The year-over-year change was driven primarily by the following factors:

	•		Depressed markets. Dysfunctional credit markets and plunging asset values resulted in weak economic activity. Energy prices plunged as a result of the reduction in economic activity, leading to the decline in the oil and gas exploration market. Similarly, as the flow of credit slowed and economic uncertainty rose, the commercial construction markets suffered. Agricultural commodity prices also fell sharply, resulting in a softening of the agricultural market. The impact of the recession was felt across all of the division’s markets, with sales to the two largest markets—energy and construction —decreasing approximately 40% and 25%, respectively.
	•		Sales volume and selling prices. Selling prices decreased approximately 16% and sales volume as measured by pounds

			shipped fell 17% year-over-year. These negative trends reflected market disruptions, competitive pricing pressures stemming from excess industry capacity and lower resin costs due to relatively low natural gas prices.
	•		Cost containment. Management responded quickly and decisively to the freefall in business activity experienced in the fourth quarter of fiscal 2009. The necessary steps were taken to align the division with the weak business environment, by tightly managing expenses and decreasing headcount.
	•		Margin preservation. Poor economic conditions, volatile material costs and competitive pricing pressures continued to squeeze margins. However, the impact of these factors was more than offset by opportune purchases of prime grade resin and cost containments. Consequently, gross margins increased from 16.1% to 20.4%.
	•		Operating expenses. Full-year operating expenses increased to 4.4% of sales in fiscal 2010 from 4.0% in fiscal 2009. Research and development expenses were flat year-over-year. Selling expenses of $2.4 million decreased 25% year-over-year through reductions in personnel and promotional expenses. However, this lagged the 29% drop in sales.

Aerostar

Aerostar manufactures military parachutes, protective wear, custom-shaped inflatable products and high-altitude and tethered aerostats for government and commercial research.

Financial highlights for the fiscal years ended January 31,

dollars in thousands		2011				% change				2010				% change				2009
Net sales		$	48,787				79	%		$	27,244				0	%		$	27,186
Gross profit			12,475				88	%			6,632				28	%			5,189
Gross margins			25.6	%							24.3	%							19.1	%
Operating income		$	9,407				67	%		$	5,634				34	%		$	4,219
Operating margins			19.3	%							20.7	%							15.5	%

Fiscal 2011 net sales of $48.8 million increased $21.5 million (79%) and operating income of $9.4 million grew $3.8 million (67.0%) over fiscal 2010.

Fiscal 2011 fourth quarter net sales of $12.0 million increased $3.0 million (34%) and operating income of $2.3 million increased $0.2 million (10%) versus fiscal 2010.

Fiscal 2011 full-year and fourth quarter comparative results were primarily attributable to the following:

	•		Tethered aerostats. Aerostar capitalized on strong demand from the U.S. military for persistent ground surveillance systems to be deployed in Afghanistan. This segment provides the helium filled blimp, along with the fiber optics and deployment system. The blimp is then equipped with surveillance equipment and flown on a tether at over 1,500 feet above ground level to enable persistent surveillance of a wide area.
	•		Volatility in aerostat deliveries. Sequentially, fiscal 2011 quarterly sales of aerostats varied materially ($8.2 million in the first quarter; $3.2 million in the second quarter; $7.4 million in the third quarter and $3.6 million in the fourth quarter) as design changes and funding shifts have impacted the timing of deliveries.
	•		Military parachutes. Fiscal 2011 full-year and fourth quarter parachute revenue increased over 20% as the T-11 parachutes ramped to full production and deliveries under the T-11 spares contract began.
	•		Gross Margins. Full-year gross margins improved year-over-year. The negative effect of T-11 parachute start-up costs in the first half of the year and increased overhead was partially offset by a more favorable product mix as the relative contribution of tethered aerostats to total sales grew.
	•		Operating expenses. Operating expenses of $3.1 million or 6.3% of sales increased $2.1 million from $1.0 million or 3.7% of sales as a result of higher selling expenses and significant investments in research and development primarily to support aerostat development.

Fiscal 2010 net sales of $27.2 million were flat and operating income of $5.6 million grew $1.4 million (34%) over fiscal 2009.

Fiscal 2010 results were driven by the following:

	•		Sales volumes. Flat year-over-year sales reflected increased deliveries of MC-6 Army parachutes, aerostats and research balloons, offset by decreased deliveries of protective wear due to the completion of a large contract in January 2009.
	•		Margin expansion. The improvement in gross and operating margins came from increased parachute manufacturing efficiencies. Final production runs and deliveries were made at the end of fiscal 2010 on the MC-6 parachute contract. Fiscal 2010 was the most profitable year for the program, primarily due to the higher efficiency level attained.

•

Operating expenses. Operating expenses were relatively flat year-over-year.

Electronic Systems

Electronic Systems is a total-solutions provider of electronics manufacturing services, primarily to North American original equipment manufacturers.

Financial highlights for the fiscal years ended January 31,

dollars in thousands		2011				% change				2010				% change				2009
Net sales		$	65,852				4	%		$	63,525				2	%		$	61,983
Gross profit			11,234				10	%			10,258				42	%			7,218
Gross margins			17.1	%							16.1	%							11.6	%
Operating income		$	9,917				10	%		$	8,979				52	%		$	5,926
Operating margins			15.1	%							14.1	%							9.6	%

Fiscal 2011 net sales of $65.9 million increased $2.3 million (4%) and operating income of $9.9 million grew $0.9 million (10%) from fiscal 2010.

Fiscal 2011 fourth quarter net sales of $13.7 million were flat and operating income of $1.7 million decreased $0.3 million (14%) from fourth quarter fiscal 2010.

The following factors affected fiscal 2011 full-year results:

	•		Sales volume. Fiscal 2011 revenue was positively impacted by avionics growth and increased sourcing of assemblies to Applied Technology partially offset by weaker deliveries of circuit boards for secure communication devices.
	•		Profit margins. Product mix had a favorable impact on full-year operating margins. Fourth quarter operating margins of 12.2% were down from 14.2% in the fourth quarter of fiscal 2010 due to a less favorable mix and increased overhead costs to compensate for supply chain weakness on flat sales volume.
	•		Operating expenses. Fiscal 2011 operating expenses were relatively unchanged from fiscal 2010 levels.

Fiscal 2010 net sales of $63.5 million increased $1.5 million (2%) and operating income of $9.0 million grew $3.1 million (52%) from fiscal 2009.

Fiscal 2010 full-year comparative results reflected the following:

	•		Growth from existing customers. The rise in sales was attributable to higher deliveries of avionics and secure communication electronics to meet increased demand from government agencies and the aerospace market, partially offset by a smaller customer base.
	•		Margin expansion. Gross margins expanded as a result of positive operating leverage produced through increased sales to existing customers, favorable product mix and cost controls—such as headcount reduction and facility consolidation.
	•		Operating expenses. Operating expenses were relatively flat year over year.

Corporate Expenses (administrative expenses, income taxes and interest income and other, net)

		For the years ended January 31
dollars in thousands		2011				2010				2009
Administrative expenses		$	9,784			$	7,407			$	8,502
Administrative expenses as a % of sales			3.1	%			3.1	%			3.0	%
Interest income and other, net		$	79			$	102			$	507
Effective tax rate			32.8	%			34.0	%			34.4	%

Administrative expenses increased 32% in fiscal 2011 compared with fiscal 2010, as a result of higher compensation expense due to increased headcount and higher incentive compensation. Administrative expenses declined 13% in fiscal 2010 compared with fiscal 2009, driven by headcount reductions and lower incentive compensation and legal expenses.

“Interest income and other, net” consists mainly of interest income, bank fees and foreign currency transaction gain or loss. The

year-over-year variability is attributable primarily to a decrease in interest income due to lower interest rates and fluctuations in exchange rates.

The fiscal 2011 effective tax rate was favorably affected by the U.S. federal tax deduction from income attributable to manufacturing activities. Fourth quarter fiscal 2011 tax expense was favorably impacted by renewal of the U.S. research and development tax credit in December 2010. The rate is expected to increase slightly in fiscal 2012.

Management believes double digit sales and profit growth for fiscal 2012 is achievable, building on strong fiscal 2011 results.

Fiscal 2010 cash preservation and cost containment strategies enabled management to reinvest across the company and return $34 million to shareholders in fiscal 2011 while maintaining substantial liquidity and a strong capital base. In fiscal 2012, management plans to accelerate the rate of organic investment through increased research and development, and capital investments. Management also continues to look for complementary acquisitions to augment existing products and markets, while supporting growth in quarterly dividends. In the near-term, profit margins could be pressured but these investments are intended to position the company for long-term growth.

Management will continue to make significant investments in product development and global expansion and is committed to building on prior year investments in SST and Ranchview. The development of an industry-leading decision-support system helps position Applied Technology as a premier total precision solutions provider (GPS steering devices, planting and spraying controls, data collection, transmission, storage and analysis). Applied Technology’s strategy of integrate, inform and innovate along with strong brand recognition, ease of use, product localization and industry leading service creates strong growth opportunities. Worldwide agriculture conditions are expected to remain healthy for this segment, with rising global demand for food, heightened environmental concerns and broadening recognition of Raven’s suite of productivity tools as a cost-effective investment supporting management’s outlook for profit growth that could approach the 20% range.

The addition of new extrusion equipment in the second half of fiscal 2012 is expected to increase annual capacity by approximately 25%. This equipment will improve sales opportunities by adding both new capacity and capabilities to this segment. Additional depreciation and new product introduction costs will partially offset the positive impact of the higher pounds produced until new extrusion capacity is fully utilized. This ramp-up period has typically taken 2-3 years, depending on market conditions.

In addition, profit margins are highly dependent on the ratio of selling prices to input costs. The selling price of blown films is largely driven by competitive pricing pressure, capacity utilization and market dynamics—supply and demand. Plastic resin—a derivative of natural gas and oil—is the primary component of extruded films. Management anticipates continuing demand for pit liners for oil exploration, geomembrane products for lining and capping landfills, water canals and reservoirs and to build on its success with highly engineered films such as FeedFresh™ silage covers and VaporBlock Plus™ radon barriers. Double digit growth is possible, if management is able to bring the new equipment on line and exploit its new capabilities in the second half of the year.

Management projects strong sales growth for the first half of the coming year. Tethered aerostat systems deployed in Afghanistan have promoted the safety of U.S. troops by successfully providing continuous wide-area surveillance of insurgents. Management is optimistic about new opportunities in tethered aerostats and anticipates follow-on opportunities to provide cost-effective persistent surveillance for the military. As in this past year, deliveries could vary significantly by quarter as follow-on orders are dependent on the government funding process. Management also sees opportunities for growth under existing government contracts for military parachutes and new contracts for protective wear. The engineering knowledge and manufacturing technology gained from these relationships along with expertise in sewing and sealing specialty fabrics will help solidify Aerostar’s competitive advantage. Additional investment in product and market development is expected to partially offset the impact of sales growth, but profit growth in the 15-20% range is possible.

Management looks at Electronic Systems as a complementary business to its growth divisions: Engineered Films, Aerostar and especially Applied Technology. This business carries technical expertise that support the efforts of its sister divisions and provides electronic manufacturing services to low-volume high-mix customers that require high levels of service and engineering support. Management anticipates adding an additional customer in fiscal 2012, but believes this growth will be more than offset by lower avionics sales. The mid- to long-term growth strategy is predicated on the development of proprietary products, expansion of the customer base and continued in-sourcing of assemblies for Raven’s other divisions. Electronic Systems Division results for fiscal

2012 are expected to be roughly flat or somewhat lower than in fiscal 2011.

The company’s balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been Raven’s primary source of liquidity. Management expects that current cash, combined with the generation of positive operating cash flows, will be sufficient to fund the company’s operating, investing and financing activities.

Raven’s cash needs are seasonal, with working capital demands strongest in the first quarter. As a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in working capital.

Cash, cash equivalents and short-term investments totaled $38.6 million at January 31, 2011, a $5.1 million decrease from $43.7 million on the same date in 2010. In September 2010, the company paid a special cash dividend of $22.5 million.

Raven has an uncollateralized credit agreement that provides an $8.0 million line of credit, with a balance of zero at January 31, 2011. The line of credit is reduced by outstanding letters of credit totaling $1.3 million as of January 31, 2011. The credit line, which matures on July 1, 2011, is expected to be renewed during fiscal 2012.

Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, services, employee compensation and income taxes. Management evaluates working capital levels through the computation of average days sales outstanding and inventory turnover. Average days sales outstanding is a measure of the company’s efficiency in enforcing its credit policy. The inventory turnover ratio is a metric used to evaluate the effectiveness of inventory management, with further consideration given to balancing the disadvantages of excess inventory with the risk of delayed customer deliveries.

Cash provided by operating activities was $42.1 million in fiscal 2011 compared with $47.6 million in fiscal 2010. The decrease in operating cash flows is the result of increased working capital to support growth, partially offset by higher company earnings.

Inventory consumed $9.2 million of cash in fiscal 2011 versus cash generated of $1.6 million in fiscal 2010 reflecting higher raw material costs, higher forecasted demand, delayed deliveries at Electronic Systems and purchases of plastic resins at Engineered Films in anticipation of price increases. Similarly, accounts receivable consumed cash of $5.5 million in fiscal 2011 versus cash generated of $6.3 million in fiscal 2010, reflecting higher receivables associated with sales growth—particularly sales of engineered films and tethered aerostats. The company continues to focus on disciplined inventory management (inventory turnover of 5.6X in fiscal 2011 versus 5.3X in fiscal 2010) and improved cash collections (average days sales outstanding of 48 days in fiscal 2011 versus 52 days in fiscal 2010). Year-over-year variability in accounts payable and accrued liabilities generated $7.1 million in cash, as compared with cash inflows of $2.4 million in fiscal 2010. This reflected an increase in accounts payable commensurate with the rise in inventory and higher incentive compensation accruals associated with strong profits. Bad debt expense was not material for both fiscal 2011 and 2010.

In fiscal 2010, reductions in inventory and accounts receivable generated $7.9 million in cash versus cash consumed of $4.2 million in fiscal 2009. Lower business levels, disciplined inventory management (inventory turnover of 5.3X in fiscal 2010 versus 5.2X in fiscal 2009) and improved cash collections (average days sales outstanding of 52 days in fiscal 2010 versus 54 days in fiscal 2009) resulted in strong operating cash flows. Additionally, year-over-year variability in accounts payable generated $2.9 million in cash, as compared with $1.0 million in fiscal 2009, due to more favorable payment terms. This favorable cash impact was partially offset by a decrease in accrued liabilities, which reflected lower compensation accruals and the acceleration of a $1.1 million cash contribution to the employee 401(k) plan, due to a change in the plan design. Fiscal 2010 bad debt recoveries of $0.2 million compared favorably to prior-year expense of $0.6 million, reflecting lower sales and more stable economic conditions— particularly related to the company’s international exposure.

Cash used in investing activities totaled $11.4 million in fiscal 2011, $13.4 million in fiscal 2010 and $7.0 million in fiscal 2009. The fiscal 2011 decrease from the prior year reflects a $10.7 million increase in capital expenditures offset by a $5.0 million decrease in net purchases of short-term investments, proceeds of $0.9 million on the disposition of an Engineered Films warehouse and $6.5 million of cash outlays in fiscal 2010 for the SST and Ranchview investments.

The increase in cash invested between fiscal 2010 and 2009 was the result of a $4.5 million increase in net purchases of short-term investments and $6.5 million of cash outlays for the SST and Ranchview investments, partially offset by a $4.7 million reduction in capital expenditures.

Management anticipates record capital spending in fiscal 2012—in the $30 million range —as management sees opportunities to earn attractive returns on invested capital through organic investments. In addition, management will evaluate strategic acquisitions that result in expanded capabilities and solidify competitive advantages.

Cash used in financing activities is primarily for dividend payments and repurchases of common stock.

Financing activities consumed cash of $33.8 million in fiscal 2011 compared with $9.9 million in fiscal 2010 and $37.0 million in fiscal 2009.

In fiscal 2011, the company paid quarterly dividends totaling $11.5 million, or 64 cents per share, and paid a special dividend of $22.5 million, or $1.25 per share.

In fiscal 2010, the company paid quarterly dividends totaling $9.9 million, or 55 cents per share.

In fiscal 2009, the company paid quarterly dividends totaling $9.4 million, or 52 cents per share; paid a special dividend of $22.5 million, or $1.25 per share and repurchased $5.2 million of stock.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of January 31, 2011, the company is obligated to make cash payments in connection with its non-cancelable operating leases for facilities and equipment and unconditional purchase obligations—primarily for raw materials—in the amounts listed below. The company has no off-balance sheet debt or other unrecorded obligations other than the items noted in the following table. In addition to the commitments noted there, standby letters of credit totaling $1.3 million have been issued, primarily to support self-insured workers compensation bonding requirements. In the event the bank chooses not to renew the company’s line of credit, the letters of credit would cease and alternative methods of support for the insurance obligations would be necessary, would be more expensive and would require additional cash outlays. Management believes the chances of this are remote.

A summary of the obligations and commitments at January 31, 2011 and for the next five years is shown below.

						Less than				1-3				3-5				More than
dollars in thousands		Total				1 year				years				years				5 years
Contractual Obligations:
Line of credit(a)		$	—			$	—			$	—			$	—			$	—
Operating leases			355				237				118				—				—
Postretirement benefits			5,969				212				460				504				4,793
Unconditional purchase obligations			56,812				56,812				—				—				—
Uncertain tax positions(b)			—				—				—				—				—
		$	63,136			$	57,261			$	578			$	504			$	4,793

CRITICAL ACCOUNTING ESTIMATES

Critical accounting policies are those that require the application of judgment when valuing assets and liabilities on the company’s balance sheet. These policies are discussed below, because a fluctuation in actual results versus expected results could materially affect operating results and because the policies require significant judgments and estimates to be made. Accounting related to these policies is initially based on best estimates at the time of original entry in the accounting records. Adjustments are periodically recorded when the company’s actual experience differs from the expected experience underlying the estimates. These adjustments could be material if experience were to change significantly in a short period of time. The company does not enter into derivatives or other financial instruments for trading or speculative purposes. However, Raven has used derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on transactions that are denominated in currency other than its functional currency, which is the U.S. dollar. The use of these financial instruments had no material effect on the company’s financial condition, results of operations or cash flows.

The company estimates inventory valuation each quarter. Typically, when a product reaches the end of its lifecycle, inventory value declines slowly or the product has alternative uses. Management uses its manufacturing resources planning data to help determine if inventory is slow-moving or has become obsolete due to an engineering change. The company closely reviews items that have balances in excess of the prior year’s requirements, or that have been dropped from production requirements. Despite these reviews, technological or strategic decisions made by management or Raven’s customers may result in unexpected excess material. Electronic Systems typically has recourse to customers for obsolete or excess material. When Electronic Systems customers authorize inventory purchases—especially with long lead-time items—they are required to take delivery of unused material or compensate the company accordingly. In every Raven operating unit, management must manage obsolete inventory risk. The accounting judgment ultimately made is an evaluation of the success that management will have in controlling inventory risk and mitigating the impact of obsolescence when it does occur.

Estimated warranty liability costs are based on historical warranty costs and average time elapsed between purchases and returns for each business segment. Warranty issues that are unusual in nature are accrued for individually.

Determining the level of the allowance for doubtful accounts requires management’s best estimate of the amount of probable credit losses based on historical writeoff experience by segment and an estimate of the collectibility of any known problem accounts. Factors that are considered beyond historical experience include the length of time the receivables are outstanding, the current business climate and the customer’s current financial condition.

Estimated returns or sales allowances are recognized upon shipment of a product. The company sells directly to customers or distributors that incur the expense and commitment for any post-sale obligations beyond stated warranty terms.

Management assesses goodwill for impairment annually—or more frequently if events or changes in circumstances indicate that an asset might be impaired—using fair value measurement techniques. For goodwill, Raven performs impairment reviews by reporting units which are the company’s reportable segments.

In the first step of goodwill impairment testing, the corporate discount rate is calculated so that the discounted cash flows are equal to Raven’s net enterprise value. The corporate discount rate is then increased when evaluating any individual reporting unit due to any additional risk factors inherent within the unit versus the corporation as a whole. A discounted cash flow analysis is then completed for the reporting unit using the adjusted discount rate. The discounted cash flow assumptions primarily include forecasted sales and costs and the discount rate. Management evaluates the merits of each significant assumption used to determine the fair value of the reporting unit.

The estimated fair value of the reporting unit is then compared with its net assets. If the estimated fair value of the reporting unit is less than the net assets of the reporting unit, an impairment loss is possible and a more refined measurement of the impairment loss would take place. This is the second step of the goodwill impairment testing, in which management may use market comparisons and recent transactions to assign the fair value of the reporting unit to all of the assets and liabilities of that unit. The valuation methodologies in both steps of goodwill impairment testing use significant estimates and assumptions, which include projected future cash flows (including timing and the risks inherent in future cash flows), perpetual growth rates and determination of appropriate market comparables.

For long-lived assets, including intangibles; investments in affiliates; and property, plant and equipment, management tests for recoverability whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. Property, plant and equipment are depreciated over the estimated lives of the assets using accelerated methods, which reduces the likelihood of an impairment loss. Management periodically discusses any significant changes in the utilization of long-lived assets, which may result from—but are not limited to—an adverse change in the asset’s physical condition or a significant adverse change in the business climate. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining its fair value.

Accounting for tax positions requires judgments, including estimating reserves for uncertainties associated with the interpretation

of income tax laws and regulations and the resolution of tax positions with tax authorities after discussions and negotiations. The ultimate outcome of these matters could result in material favorable or unfavorable adjustments to the consolidated financial statements.

NEW ACCOUNTING STANDARDS

In December 2010, the Financial Accounting Standards Board issued guidance on goodwill impairment testing. This guidance modifies the first step of the goodwill impairment test to include reporting units with zero or negative carrying amounts. For these reporting units, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. The guidance is effective for fiscal years and interim periods beginning after December 15, 2010. The adoption of this guidance on February 1, 2011, is not expected to have a material impact on the company’s consolidated results of operation, financial condition or cash flows.

ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The exposure to market risks pertains mainly to changes in interest rates on cash and cash equivalents and short-term investments. The company has no debt. The company does not expect operating results or cash flows to be significantly affected by changes in interest rates. Additionally, the company does not enter into derivatives or other financial instruments for trading or speculative purposes. However, the company does utilize derivative financial instruments to manage the economic impact of fluctuation in foreign currency exchange rates on those transactions that are denominated in currency other than its functional currency, which is the U.S. dollar. The use of these financial instruments had no material effect on the company’s financial condition, results of operations or cash flows.

The company’s subsidiaries that operate outside the United States use their local currency as the functional currency. The functional currency is translated into U.S. dollars for balance sheet accounts using the period-end exchange rates, and average exchange rates for the statement of income. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in accumulated other comprehensive income (loss) within shareholders’ equity. Foreign currency transaction gains or losses are recognized in the period incurred and are included in “interest income and other, net” in the Consolidated Statements of Income. Foreign currency fluctuations had no material effect on the company’s financial condition, results of operations or cash flows.

ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

		Page(s)
Management’s Report on Internal Control Over Financial Reporting			27
Report of Independent Registered Public Accounting Firm			28
Consolidated Financial Statements
Consolidated Balance Sheets			29
Consolidated Statements of Income			30
Consolidated Statements of Shareholders’ Equity and Comprehensive Income			31
Consolidated Statements of Cash Flows			32
Notes to Consolidated Financial Statements			33
Quarterly Information (Unaudited) — included in Item 5 on page 10			10