e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File: 001-07982
RAVEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
     
South Dakota
(State of incorporation)
  46-0246171
(IRS Employer Identification No.)
205 East 6th Street
P.O. Box 5107
Sioux Falls, SD 57117-5107

(Address of principal executive offices)
(605) 336-2750
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of August 31, 2010 there were 18,038,313 shares of common stock, $1 par value, of Raven Industries, Inc. outstanding. There were no other classes of stock outstanding.
 
 

 


 

RAVEN INDUSTRIES, INC.
INDEX
         
     
PAGE
 
       
 
       
       
    3  
    4  
    5  
    6-8  
    9-14  
    15  
    15  
 
       
       
 
       
    16  
    16  
    16  
    16  
    16  
    16  
    16  
    16  
 EX-10.1
 EX-10.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I — FINANCIAL INFORMATION
RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
                         
    July 31,     January 31,     July 31,  
(in thousands except share data)   2010     2010     2009  
 
ASSETS
                       
Current Assets
                       
Cash and cash equivalents
  $ 51,115     $ 40,684     $ 41,032  
Short-term investments
    2,500       3,000       2,000  
Accounts receivable, net of allowances of $299, $297, and $350, respectively
    34,670       34,327       29,155  
Inventories:
                       
Materials
    29,453       24,020       21,352  
In process
    8,387       4,172       3,738  
Finished goods
    7,352       6,283       4,359  
 
                 
Total inventories
    45,192       34,475       29,449  
Deferred income taxes
    2,725       2,471       2,508  
Prepaid expenses and other current assets
    3,295       2,790       3,123  
 
                 
Total current assets
    139,497       117,747       107,267  
 
                 
 
                       
Property, plant and equipment
    91,702       88,319       88,370  
Accumulated depreciation
    (57,799 )     (55,290 )     (53,257 )
 
                 
Property, plant and equipment, net
    33,903       33,029       35,113  
Goodwill
    10,777       10,699       7,716  
Amortizable intangible assets, net
    1,887       2,185       1,376  
Other assets, net
    6,933       6,649       1,534  
 
                 
 
                       
TOTAL ASSETS
  $ 192,997     $ 170,309     $ 153,006  
 
                 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current Liabilities
                       
Accounts payable
  $ 14,842     $ 12,398     $ 8,485  
Accrued liabilities
    12,748       10,682       10,140  
Taxes — accrued and withheld
    1,449       1,574       1,130  
Customer advances
    3,034       1,306       522  
 
                 
Total current liabilities
    32,073       25,960       20,277  
 
                       
Other liabilities
    11,512       11,098       7,898  
 
                 
Total liabilities
    43,585       37,058       28,175  
 
                 
 
                       
Commitments and contingencies
                       
 
                       
Shareholders’ equity:
                       
Common stock, $1 par value, authorized shares 100,000,000; issued 32,486,746; 32,478,416 and 32,469,598, respectively
    32,487       32,478       32,470  
Paid in capital
    6,134       5,604       5,035  
Retained earnings
    165,252       149,732       141,646  
Accumulated other comprehensive income (loss)
    (1,099 )     (1,201 )     (958 )
 
                 
 
    202,774       186,613       178,193  
Less treasury stock, at cost, 14,448,683 shares
    53,362       53,362       53,362  
 
                 
Total shareholders’ equity
    149,412       133,251       124,831  
 
                 
 
                       
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 192,997     $ 170,309     $ 153,006  
 
                 
The accompanying notes are an integral part of the unaudited consolidated financial information.

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RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,     July 31,     July 31,  
(in thousands except per share data) 2010   2009   2010     2009  
   
Net sales
  $ 73,174     $ 56,586     $ 158,204     $ 121,808  
Cost of goods sold
    52,785       41,474       110,644       86,268  
 
                       
 
                               
Gross profit
    20,389       15,112       47,560       35,540  
 
                               
Research and development expenses
    1,956       1,372       4,082       2,888  
 
                               
Selling, general and administrative expenses
    5,810       4,434       11,350       9,233  
 
                       
 
                               
Operating income
    12,623       9,306       32,128       23,419  
 
                               
Other expense (income), net
    94       (105 )     42       (106 )
 
                       
 
                               
Income before income taxes
    12,529       9,411       32,086       23,525  
 
                               
Income taxes
    4,176       3,207       10,788       8,090  
 
                       
 
                               
Net income
  $ 8,353     $ 6,204     $ 21,298     $ 15,435  
 
                       
 
                               
Net income per common share:
                               
Basic
  $ 0.46     $ 0.34     $ 1.18     $ 0.86  
Diluted
  $ 0.46     $ 0.34     $ 1.18     $ 0.86  
 
                               
Cash dividends paid per common share
  $ 0.16     $ 0.14     $ 0.32     $ 0.27  
The accompanying notes are an integral part of the unaudited consolidated financial information.

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RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
                 
    Six Months Ended  
    July 31,     July 31,  
(in thousands)   2010     2009  
   
OPERATING ACTIVITIES:
               
Net income
  $ 21,298     $ 15,435  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    3,594       3,530  
Change in fair value of acquisition-related contingent consideration
    352        
Deferred income taxes
    (753 )     25  
Share-based compensation expense
    567       544  
Change in operating assets and liabilities:
               
Accounts receivable
    (280 )     11,407  
Inventories
    (10,712 )     6,571  
Prepaid expenses and other assets
    (594 )     (724 )
Operating liabilities
    6,464       (2,302 )
Other operating activities, net
    (120 )     (165 )
 
           
Net cash provided by operating activities
    19,816       34,321  
 
           
 
               
INVESTING ACTIVITIES:
               
Capital expenditures
    (3,774 )     (2,304 )
Purchase of short-term investments
    (1,700 )     (2,000 )
Sale of short-term investments
    2,200        
Payments related to business acquisitions
    (383 )     (283 )
Other investing activities, net
    75       (114 )
 
           
Net cash used in investing activities
    (3,582 )     (4,701 )
 
           
 
               
FINANCING ACTIVITIES:
               
Dividends paid
    (5,771 )     (4,864 )
Other financing activities, net
    (36 )     (37 )
 
           
Net cash used in financing activities
    (5,807 )     (4,901 )
 
           
 
               
Effect of exchange rate changes on cash
    4       46  
 
           
 
               
Net increase in cash and cash equivalents
    10,431       24,765  
 
               
Cash and cash equivalents:
               
Beginning of period
    40,684       16,267  
 
           
End of period
  $ 51,115     $ 41,032  
 
           
The accompanying notes are an integral part of the unaudited consolidated financial information.

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RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial information has been prepared by Raven Industries, Inc. (the “company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, it does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim three and six-month periods ended July 31, 2010 are not necessarily indicative of the results that may be expected for the year ending January 31, 2011. The January 31, 2010 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. This financial information should be read in conjunction with the consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended January 31, 2010.
(2) Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average common shares and stock units outstanding. Diluted net income per share is computed by dividing net income by the weighted-average common and common equivalent shares outstanding (which includes the shares issuable upon exercise of employee stock options net of shares assumed purchased with the option proceeds) and stock units outstanding. Certain outstanding options were excluded from the diluted net income per-share calculations because their effect would have been anti-dilutive. For the three and six-month periods ended July 31, 2010, 155,400 shares were excluded. For the three and six-month periods ended July 31, 2009, 318,600 and 318,663 shares were excluded, respectively. Details of the earnings per share computation are presented below:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,     July 31,     July 31,  
    2010     2009     2010     2009  
 
Numerator:
                               
Net income (in thousands)
  $ 8,353     $ 6,204     $ 21,298     $ 15,435  
 
                       
 
                               
Denominator:
                               
Weighted average common shares outstanding
    18,036,658       18,020,535       18,033,195       18,016,393  
Weighted average stock units outstanding
    25,957       20,954       23,611       18,047  
 
                       
Denominator for basic calculation
    18,062,615       18,041,489       18,056,806       18,034,440  
 
                       
 
                               
Weighted average common shares outstanding
    18,036,658       18,020,535       18,033,195       18,016,393  
Weighted average stock units outstanding
    25,957       20,954       23,611       18,047  
Dilutive impact of stock options
    33,645       2,215       21,735       3,305  
 
                       
Denominator for diluted calculation
    18,096,260       18,043,704       18,078,541       18,037,745  
 
                       
 
                               
Net income per share — basic
  $ 0.46     $ 0.34     $ 1.18     $ 0.86  
Net income per share — diluted
  $ 0.46     $ 0.34     $ 1.18     $ 0.86  
(3) Segment Reporting
The company’s reportable segments are defined by their common technologies, production processes and inventories. These segments reflect Raven’s organization into three Raven divisions and the Aerostar subsidiary. Raven Canada, Raven GmbH and the company’s new Raven Industries Australia Pty Ltd sales office are included in the Applied Technology Division. The company measures the performance of its segments based on their operating income exclusive of administrative and general expenses. Other income, interest expense and income taxes are not allocated to individual operating segments. Segment information is reported consistent with the company’s management reporting structure.

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Intersegment sales were primarily from Electronic Systems to Applied Technology. Business segment results are as follows:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,     July 31,     July 31,  
(in thousands)   2010     2009     2010     2009  
 
Net sales
                               
Applied Technology
  $ 20,966     $ 18,572     $ 53,891     $ 48,006  
Engineered Films
    26,120       15,017       51,753       28,375  
Aerostar
    9,195       5,838       20,888       12,403  
Electronic Systems
    18,067       17,913       34,355       34,066  
Intersegment eliminations
    (1,174 )     (754 )     (2,683 )     (1,042 )
 
                       
Consolidated net sales
  $ 73,174     $ 56,586     $ 158,204     $ 121,808  
 
                       
 
                               
Operating income (loss)
                               
Applied Technology
  $ 5,518     $ 5,117     $ 17,921     $ 14,727  
Engineered Films
    5,543       2,081       9,670       4,796  
Aerostar
    1,345       1,136       3,509       2,294  
Electronic Systems
    2,813       2,962       5,937       5,457  
Intersegment eliminations
    2       (26 )     (47 )     2  
 
                       
Total reportable segment income
    15,221       11,270       36,990       27,276  
Administrative and general expenses
    (2,598 )     (1,964 )     (4,862 )     (3,857 )
 
                       
Consolidated operating income
  $ 12,623     $ 9,306     $ 32,128     $ 23,419  
 
                       
(4) Financing Arrangements
Raven has an uncollateralized credit agreement providing a line of credit of $8.0 million with a maturity date of July 1, 2011, bearing interest at the prime rate with a minimum rate of 4.00%. Letters of credit totaling $1.3 million have been issued under the line, primarily to support self-insured workers compensation bonding requirements. No borrowings were outstanding as of July 31, 2010, January 31, 2010 or July 31, 2009, and $6.7 million was available at July 31, 2010.
(5) Dividends
The company announced on August 23, 2010, that its board of directors approved a quarterly cash dividend of 16 cents per share, payable October 15, 2010, to shareholders of record on September 30, 2010. A special cash dividend of $1.25 per share was also declared to shareholders of record on September 15, 2010 and is payable September 30, 2010.
(6) Comprehensive Income
Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains, and losses that under U.S. generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net income. The components of total comprehensive income follow:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,     July 31,     July 31,  
(in thousands)   2010     2009     2010     2009  
 
Net income
  $ 8,353     $ 6,204     $ 21,298     $ 15,435  
Other comprehensive income:
                               
Foreign currency translation
    (49 )     134       48       154  
Amortization of postretirement benefit plan actuarial losses, net of income tax of $15, $11, $29 and $22, respectively
    27       21       54       42  
 
                       
Total other comprehensive (loss) income
    (22 )     155       102       196  
 
                       
Total comprehensive income
  $ 8,331     $ 6,359     $ 21,400     $ 15,631  
 
                       

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(7) Employee Retirement Benefits
The components of net periodic benefit cost for postretirement benefits are as follows:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,     July 31,     July 31,  
(in thousands)   2010     2009     2010     2009  
 
Service cost
  $ 15     $ 13     $ 31     $ 27  
Interest cost
    81       83       162       166  
Amortization of actuarial losses
    42       32       83       64  
 
                       
Net periodic benefit cost
  $ 138     $ 128     $ 276     $ 257  
 
                       
(8) Product Warranty Costs
Accruals necessary for product warranties are estimated based on historical warranty costs and average time elapsed between purchases and returns for each division. Additional accruals are made for any significant, discrete warranty issues. Changes in the warranty accrual were as follows:
                                 
    Three Months Ended     Six Months Ended  
    July 31,     July 31,     July 31,     July 31,  
(in thousands)   2010     2009     2010     2009  
 
Balance, beginning of period
  $ 1,613     $ 1,099     $ 1,259     $ 1,004  
Accrual for warranties
    711       755       1,445       1,240  
Settlements made (in cash or in kind)
    (512 )     (748 )     (892 )     (1,138 )
 
                       
Balance, end of period
  $ 1,812     $ 1,106     $ 1,812     $ 1,106  
 
                       
(9) Investment in Site-Specific Technology Development Group, Inc. (SST)
In November 2009, the company acquired a 20% interest in SST for $5.0 million. SST is a privately held agricultural software development and information services provider. Raven and SST are strategically aligned to provide customers with simple, more efficient ways to move and manage information in the precision agriculture market. At the acquisition date, the carrying value of the SST investment exceeded the company’s share of the underlying net assets of SST by $5.0 million. During the first quarter of fiscal 2011, the company completed its analysis of this excess and determined that it related to $1.1 million of technology-related assets to be amortized over a seven-year period and $3.2 million of license-related assets to be amortized over a ten-year period. The remainder of the excess is attributable to equity method goodwill.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This commentary should be read in conjunction with the company’s consolidated financial statements for the three and six months ended July 31, 2010 and July 31, 2009, as well as the company’s consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations in the company’s Form 10-K for the year ended January 31, 2010.
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, Aerostar and Electronic Systems.
Seasonality
The Applied Technology segment is predominately focused on the agricultural market and quarterly financial results have typically been impacted by the inherent seasonality of this market. Historically, Applied Technology’s first quarter results are the strongest and the second quarter the weakest.
Results of Operations
Consolidated financial highlights for the second quarter and first six months of fiscal 2011 and fiscal 2010 include the following:
                                                 
    Three Months Ended   Six Months Ended
    July 31,   July 31,   %   July 31,   July 31,   %
(dollars in thousands, except per share data)   2010   2009   Change   2010   2009   Change
 
Net sales
  $ 73,174     $ 56,586       29 %   $ 158,204     $ 121,808       30 %
Gross profit
    20,389       15,112       35 %     47,560       35,540       34 %
Gross margins(a)
    27.9 %     26.7 %             30.1 %     29.2 %        
Operating income
  $ 12,623     $ 9,306       36 %   $ 32,128     $ 23,419       37 %
Operating margins
    17.3 %     16.4 %             20.3 %     19.2 %        
Net income
  $ 8,353     $ 6,204       35 %   $ 21,298     $ 15,435       38 %
Diluted earnings per share
    0.46       0.34       35 %     1.18       0.86       37 %
 
                                               
Operating cash flow
                            19,816       34,321       (42 )%
Cash dividends
                            5,771       4,864       19 %
 
(a)   The company’s gross margins may not be comparable to industry peers due to variability in the classification of expenses across industries in which the company operates.
Double digit year-over-year sales and profit growth in Applied Technology, Engineered Films and Aerostar led to record sales and profitability in the second quarter and first half of fiscal 2011. For the first six months, Electronic Systems operating income grew by 9% year-over-year on relatively flat sales but for the quarter fell 5%. The company’s solid financial results were driven primarily by market share gains, new products, disciplined margin management, operating efficiencies, productivity gains and solid returns on capital investments. General economic conditions improved modestly during the first half of fiscal 2011. The pace and durability of the economic recovery remain highly uncertain—high unemployment, fragile real estate markets and weak consumer spending will likely be a drag on economic recovery.
Applied Technology
Net sales of $21.0 million in the second quarter of fiscal 2011 were up $2.4 million (13%) and operating income of $5.5 million increased $401,000 (8%) compared to the second quarter of fiscal 2010. First half fiscal 2011 net sales of $53.9 million grew $5.9 million (12%) and first half operating income of $17.9 million rose $3.2 million (22%). The primary driver of the six month year-over-year growth in sales and profitability was the highly successful 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—along with growth in application controls and steering and guidance products. Gross margins benefited from a more favorable product mix and the positive effect of higher sales on operating leverage.

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Engineered Films
Fiscal 2011 second quarter net sales of $26.1 million grew $11.1 million (74%) and operating income of $5.5 million increased $3.5 million (166%) as compared to the second quarter of fiscal 2010. Fiscal 2011 first half net sales of $51.8 million increased $23.4 million (82%) and operating income of $9.7 million doubled from the first half of fiscal 2010. The positive impact of higher oil prices on demand for energy market pit liners fueled the growth in sales and operating income. Sequentially, gross margins increased from 19.5% in the first quarter of fiscal 2011 to 24.2% in the current quarter due to more favorable resin costs and improved capacity utilization.
Aerostar
Fiscal 2011 second quarter sales of $9.2 million grew $3.4 million (58%) and operating income of $1.3 million improved by $209,000 (18%) as compared to the second quarter of fiscal 2010. First half sales of $20.9 million grew $8.5 million (68%) and operating income of $3.5 million improved $1.2 million (53%) compared to the first half of fiscal 2010. The sales and operating income gains were driven by increased demand for tethered aerostat systems for persistent military surveillance. Fiscal 2011 second quarter and year-to-date profit growth was negatively affected by start-up costs related to the T-11 Army Airborne parachute contract. Parachute deliveries began mid-first quarter of fiscal 2011 and will ramp up to full production levels in the second half of fiscal 2011.
Electronic Systems
Net sales of $18.1 million in the second quarter of fiscal 2011 grew slightly (1%) while operating income of $2.8 million fell 5%. Net sales of $34.4 million for the six months ended July 31, 2010 were relatively flat and operating income of $5.9 million increased $480,000 (9%) versus the year ago comparable period. Second quarter and first half results were negatively impacted by weaker deliveries of circuit boards for secure communication devices due to lower demand and supply-chain disruptions that tempered avionics growth. These declines were offset by higher sales of bed controls and increased sourcing of assemblies to Applied Technology.
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.
                                                                 
    Three Months Ended   Six Months Ended
    July 31,   July 31,   $   %   July 31,   July 31,   $   %
(dollars in thousands)   2010   2009   Change   Change   2010   2009   Change   Change
     
Net sales
  $ 20,966     $ 18,572     $ 2,394       13 %   $ 53,891     $ 48,006     $ 5,885       12 %
Gross profit
    8,932       7,770       1,162       15 %     24,888       20,465       4,423       22 %
Gross margins
    42.6 %     41.8 %                     46.2 %     42.6 %                
Operating income
    5,518       5,117       401       8 %     17,921       14,727       3,194       22 %
Operating margins
    26.3 %     27.6 %                     33.3 %     30.7 %                
The following factors were the primary drivers of the three and six-month year-over-year change:
    Market conditions. Improved market conditions positively impacted grower sentiment and accelerated purchasing decisions. Prices for corn, soybeans and other feed grains remain above historical levels as population and income growth in emerging economies continues to spur increased demand for food.
    Sales volume and selling prices. Sales growth for both periods was driven by higher volume as selling prices increased modestly year-over-year. While first quarter sales growth was primarily driven by Slingshot™, second quarter revenue growth came from the division’s guidance and steering product line. Product enhancements and upgrades to existing product offerings generated additional year-over-year second quarter sales.
    New product sales. New product sales were attributable to 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. Management believes sales growth in guidance and steering products reflects acceptance of Slingshot™ technology in the agricultural marketplace.

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    International sales. First half international sales of $12.8 million grew $2.6 million (26%) year-over-year. Net sales outside the U.S. accounted for 24% of segment sales in fiscal 2011 versus 21% in fiscal 2010. Sales growth in Canada and South America was partially offset by a decline in Australia.
    Gross margin improvement. Gross margins increased due to a more favorable product mix and the positive impact of higher sales on operating leverage.
    Operating expenses. Profit growth has been tempered by a higher level of operating expenses. The division continues to allocate resources to support its new product development and strategic initiatives. The increase in operating expenses for the quarter and first half reflect additional spending to achieve operational goals. For the three-month period, operating expenses were up $761,000 (29%). First half operating expenses increased to 12.9% of sales from 12.0% in the prior year. Year-to-date selling expenses increased $632,000 (20%) and research and development expenses increased $597,000 (23%).
Engineered Films
Engineered Films produces rugged reinforced plastic sheeting for industrial, construction, geomembrane and agricultural applications.
                                                                 
    Three Months Ended   Six Months Ended
    July 31,   July 31,   $   %   July 31,   July 31,   $   %
(dollars in thousands)   2010   2009   Change   Change   2010   2009   Change   Change
     
Net sales
  $ 26,120     $ 15,017     $ 11,103       74 %   $ 51,753     $ 28,375     $ 23,378       82 %
Gross profit
    6,331       2,747       3,584       130 %     11,331       6,210       5,121       82 %
Gross margins
    24.2 %     18.3 %                     21.9 %     21.9 %                
Operating income
    5,543       2,081       3,462       166 %     9,670       4,796       4,874       102 %
Operating margins
    21.2 %     13.9 %                     18.7 %     16.9 %                
The following factors were the primary drivers of the quarter and first half year-over-year change:
    Improved market conditions. Engineered Films’ primary end markets—energy, geomembrane, industrial, agriculture and construction—rebounded from prior year depressed levels. Economic growth—particularly in emerging markets—pushed crude oil prices to levels adequate to support an increase in drilling activity, which drove a substantial increase in pit liner deliveries to the energy market.
    Sales volume and selling prices. Selling prices increased approximately 9% for the first half and roughly 14% for the second quarter reflecting higher material costs as compared to one year ago. Although all of the division’s market segments showed revenue growth for the second quarter, the higher sales level was predominately driven by pit liners sold into the energy market. First half sales volume, as measured by pounds shipped, increased 69% year-over-year, as recovery of crude oil prices from their lows in early 2009 drove demand for pit liners. Additionally, six-month construction films sales—which included $1.5 million in disaster film shipments to Haiti to support earthquake relief efforts—increased roughly 30%. Year-to-date deliveries of agriculture films more than doubled as sales of FeedFresh™ silage covers gained traction due to broadened appreciation of the value-added benefits of this highly engineered film, while industrial film sales rose due to increased business activity as the economy healed.
    Margin stabilization. For the quarter, gross margins of 24.2% gained almost six percentage points from one year earlier, reflecting positive operating leverage from the higher sales volume. Year-to-date gross margins were flat year-over-year. Sequentially, fiscal 2011 gross margins improved from 19.5% in the first quarter to 24.2% in the second quarter reflecting favorable pricing as capacity utilization rose and material costs decreased.
    Operating expenses. Second quarter operating expenses of $788,000 climbed 18% versus one year earlier; however, were only 3% of sales as compared with last year’s 4%. First half operating expenses fell to 3.2% of sales from 5.0% in the prior year. Six-month operating expenses of $1.7 million increased 17% due to higher compensation expense to support sales growth and new product development.

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Aerostar
Aerostar manufactures military parachutes, protective wear, custom shaped inflatable products, and high-altitude aerostats for government and commercial research.
                                                                 
    Three Months Ended   Six Months Ended
    July 31,   July 31,   $   %   July 31,   July 31,   $   %
(dollars in thousands)   2010   2009   Change   Change   2010   2009   Change   Change
     
Net sales
  $ 9,195     $ 5,838     $ 3,357       58 %   $ 20,888     $ 12,403     $ 8,485       68 %
Gross profit
    1,998       1,358       640       47 %     4,818       2,747       2,071       75 %
Gross margins
    21.7 %     23.3 %                     23.1 %     22.1 %                
Operating income
    1,345       1,136       209       18 %     3,509       2,294       1,215       53 %
Operating margins
    14.6 %     19.5 %                     16.8 %     18.5 %                
The following factors were the primary drivers of the year-over-year change for the three and six-month periods:
    Tethered aerostats. Second quarter revenue of $3.2 million was up almost $3.0 million and first half fiscal 2011 tethered aerostat sales were approximately $11.4 million, an improvement of $10.7 million. Aerostar continues to capitalize on strong demand from the U.S. military for persistent threat detection 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 several thousand feet to enable persistent surveillance of a wide area.
    Aerostat volatility. Sequentially, aerostat sales fell from $8.2 million in the first quarter to $3.2 million for the just ended quarter. In the second quarter, aerostat system deliveries were delayed by design changes and funding shifts.
    Military parachutes. For the three-month period, parachute revenue exceeded last year’s second quarter as the T-11 parachute contract approached full production levels. For the first half, parachute revenue was down year-over-year as final shipments under the three-year MC-6 Army parachute contract concluded during the fourth quarter of fiscal 2010 and T-11 production began in the first quarter of fiscal 2011.
    Gross margins. Six-month gross margins of 23.1% increased slightly. The positive impact of aerostat growth on year-to-date gross margins was partially offset by the negative impact of T-11 start-up costs. For the quarter, gross margins of 21.7% decreased from 23.3% due to T-11 parachute start-up costs.
    Operating expenses. For the three months, operating expenses of $653,000 almost tripled the level of one year ago and represented 7.1% of sales. First half fiscal 2011 operating expenses increased to 6.3% of sales from 3.7% in the first half of fiscal 2010. Both periods reflect increased research and development and selling expense to support tethered aerostat development.
Electronic Systems
Electronic Systems is a total-solutions provider of electronics manufacturing services, primarily to North American original equipment manufacturers.
                                                                 
    Three Months Ended   Six Months Ended
    July 31,   July 31,   $   %   July 31,   July 31,   $   %
(dollars in thousands)   2010   2009   Change   Change   2010   2009   Change   Change
     
Net sales
  $ 18,067     $ 17,913     $ 154       1 %   $ 34,355     $ 34,066     $ 289       1 %
Gross profit
    3,126       3,263       (137 )     (4 )%     6,570       6,116       454       7 %
Gross margins
    17.3 %     18.2 %                     19.1 %     18.0 %                
Operating income
    2,813       2,962       (149 )     (5 )%     5,937       5,457       480       9 %
Operating margins
    15.6 %     16.5 %                     17.3 %     16.0 %                
The following factors were the primary drivers of the three and six-month year-over-year change:
    Sales volume. Increased deliveries of bed controls and additional sourcing of assemblies to the Applied Technology Division were substantially offset by lower demand for secure communications electronics and part shortages that negatively impacted avionics sales volume.
    Margin stabilization. As expected, second quarter gross margins of 17.3% fell from 21.1% reported for the first quarter, as first quarter margins benefited from a more favorable product mix which was not repeated in the second quarter. First half fiscal 2011 gross margins improved to 19.1% from 18.0% in the year ago period reflecting a more favorable product mix and

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      continued spending constraints. Management continues to tightly manage expenses—necessary steps to keep the division’s cost structure aligned with industry conditions.
    Operating expenses. Operating expenses fell slightly to 1.8% of sales in the first half of fiscal 2011 from 1.9% in the first half of fiscal 2010, reflecting lower research and development activity.
Corporate Expenses (administrative expenses; other expense (income), net; and income taxes)
                                 
    Three Months Ended   Six Months Ended
    July 31,   July 31,   July 31,   July 31,
(dollars in thousands)   2010   2009   2010   2009
     
Administrative expenses
  $ 2,598     $ 1,964     $ 4,862     $ 3,857  
Administrative expenses as a % of sales
    3.6 %     3.5 %     3.1 %     3.2 %
Other expense (income), net
  $ 94     $ (105 )   $ 42     $ (106 )
Effective tax rate
    33.3 %     34.1 %     33.6 %     34.4 %
Administrative expenses were relatively flat as a percentage of sales for the second quarter and six months ended July 31, 2010. Higher compensation expense, primarily incentive compensation, increased with the rise in sales and profitability.
“Other expense (income), net” consists mainly of interest income, foreign currency transaction gain and loss and activity related to the company’s equity investment in SST. The year-over-year expense increase for the three months ended July 31, 2010 reflects SST results in addition to the amortization of the SST technology-related assets.
The effective tax rates for the three and six month periods were favorably affected by tax benefits associated with the U.S. tax benefit on qualified production activities.
OUTLOOK
Management anticipates a record year of sales and earnings as the company continues to capitalize on energy, precision agriculture and military surveillance market opportunities.
Applied Technology
Sales and profit growth trends are expected to continue into the third quarter of fiscal 2011, driven primarily by growth in Slingshot™ and steering and guidance products. Applied Technology will continue to leverage the successful launch of the Slingshot™ product platform as a catalyst for long-term growth in information management services and integrated guidance and steering products.
Engineered Films
Engineered Films is expected to produce double-digit revenue and earnings growth in the last half of the year. Current order intake remains significantly higher than prior year levels. Sequentially, Engineered Films will face less favorable year-over-year comparisons in the second half of fiscal 2011. In fiscal 2010, results were negatively impacted by the soft construction and energy markets which began to recover in the second half of the year.
The potential for market disruptions remains high as the stability of the moderate economic recovery is uncertain. The occurrence of unforeseen adverse economic events could have a significant unfavorable impact on industry conditions—particularly the energy (oil and gas drilling) and construction markets—which are Engineered Films largest markets. The division’s long-term success depends on increased penetration of existing markets, improving the speed to market of new products and product diversification with a greater contribution to overall sales from highly engineered films.
Aerostar
Management will continue to capitalize on tethered aerostat development and deployment opportunities which should result in strong third quarter results. Long-term, management is optimistic about Aerostar becoming a significant growth engine, however, near-term quarterly sales and profit volatility is probable as the timing of additional orders is uncertain. Profit margins are expected to benefit from T-11 Army parachute production efficiencies.
Electronic Systems
Second half fiscal 2011 sales and operating income are expected to show modest year-over-year growth. Higher demand for aviation electronics and hand-held bed controls may offset lower demand for secure communication equipment. Electronic System’s operating margins are expected to trend towards the 15% range.

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LIQUIDITY AND CAPITAL RESOURCES
The company’s liquidity and capital resources are strong. Management focuses on the current cash balance and operating cash flows in considering liquidity as operating cash flows have historically been the company’s primary source of liquidity. On August 23, 2010, the company’s board of directors approved a special dividend of $1.25 per share, in addition to the normal quarterly dividend. The cash distribution for the special dividend is expected to total approximately $22.6 million. 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.
The company’s cash needs are seasonal, with working capital demands strongest in the first quarter. Consequently, 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 $53.6 million at July 31, 2010, a $9.9 million increase compared to cash, cash equivalents, and short-term investments at January 31, 2010 of $43.7 million. The comparable balances one year earlier totaled $43.0 million.
Operating Activities
Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, services, employee compensation and income taxes. Management evaluates working capital levels through the computation of day’s sales outstanding (“DSO”) and inventory turnover. DSO 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 $19.8 million in the first half of fiscal 2011 versus $34.3 million in the first half of fiscal 2010. The decrease reflects higher working capital requirements to support sales growth partially offset by higher company earnings.
Increases in inventory and accounts receivable consumed $11.0 million in cash in the first half of fiscal 2011 versus cash generated of $18.0 million in the first half of fiscal 2010. Disciplined inventory management (trailing 12-month inventory turnover of 5.5X at July 31, 2010 versus 5.2X at July 31, 2009) and efficient cash collections (trailing 12-month DSO of 48 days at July 31, 2010 versus 55 days at July 31, 2009) were offset by working capital requirements to support growth. Accounts receivable from Engineered Films and Aerostar customers increased from prior year levels, reflecting the growth in sales. Engineered Films inventory doubled year-over-year due to higher resin costs and increased quantities-on-hand to support sales growth and take advantage of favorable resin pricing. Additionally, higher production levels in Aerostar contributed to the increase in inventory along with delays in tethered aerostat deliveries. The unfavorable cash impact of higher inventory was partially offset by the favorable impact of higher accounts payable and compensation accruals due to higher inventory and earnings, respectively.
Investing Activities
Cash used in investing activities totaled $3.6 million in the first half of fiscal 2011versus $4.7 million in the first half of fiscal 2010. Capital expenditures increased from $2.3 million to $3.8 million and were more than offset by short-term investment activity.
Management anticipates fiscal 2011 capital spending of $12 to $15 million to support growth initiatives. Investments in production capability and capacity for Engineered Films and technology investments for Applied Technology and Aerostar are expected to drive the spending.
Financing Activities
Dividends of $5.8 million or 32 cents per share were paid during the first half of fiscal 2011 compared to $4.9 million or 27 cents per share in the first half of fiscal 2010.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes since the fiscal year ended January 31, 2010.
NEW ACCOUNTING STANDARDS
There were no new accounting standards issued or effective during the six months ended July 31, 2010 that had or are expected to have a material impact on the company’s consolidated results of operations, financial condition, or cash flows.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 “other income, 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 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of July 31, 2010, the end of the period covered by this report, management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) evaluated the effectiveness of disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of such date. Based on that evaluation, the CEO and CFO have concluded that the company’s disclosure controls and procedures were effective as of July 31, 2010.
Changes in Internal Control over Financial Reporting
There were no changes in the company’s internal control over financial reporting that occurred during the quarter ended July 31, 2010 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans” and similar expressions are intended to identify forward-looking statements. The company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although management believes that the expectations reflected in forward-looking statements are based on reasonable assumptions, there is no assurance that these assumptions are correct or that these expectations will be achieved. Assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions and commodity prices, which could affect sales and profitability in some of the company’s primary markets, such as agriculture, construction, and oil and gas well drilling; or changes in competition, raw material availability, technology or relationships with the company’s largest customers—any of which could adversely affect any of the company’s product lines—as well as other risks described in the company’s 10-K under Item 1A. This list is not exhaustive, and the company does not have an obligation to revise any forward-looking statements to reflect events or circumstances after the date these statements are made.

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RAVEN INDUSTRIES, INC.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings:
The company is involved as a defendant in lawsuits, claims or disputes arising in the normal course of business. The settlement of such claims cannot be determined at this time. Management believes that any liability resulting from these claims will be substantially mitigated by insurance coverage. Accordingly, management does not believe the ultimate outcome of these matters will be significant to its results of operations, financial position or cash flows.
Item 1A. Risk Factors: No material change.
Item 2. Changes in Securities: None
Item 3. Defaults upon Senior Securities: None
Item 4. Reserved
Item 5. Other Information: None
Item 6. Exhibits Filed:
     10.1      Form of Incentive Stock Option Agreement pursuant to the Raven Industries, Inc. 2010 Stock Incentive Plan †
     10.2      Form of Non-Qualified Stock Option Agreement pursuant to the Raven Industries, Inc. 2010 Stock Incentive Plan †
     31.1      Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act.
     31.2      Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act.
     32.1      Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act.
     32.2      Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act.
 
  Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  RAVEN INDUSTRIES, INC.
 
 
  /s/ Thomas Iacarella    
  Thomas Iacarella   
  Vice President and CFO, Secretary and Treasurer
(Principal Financial and Accounting Officer) 
 
 
Date: September 2, 2010

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exv10w1
Exhibit 10.1
RAVEN INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT

(Employee)
     This INCENTIVE STOCK OPTION AGREEMENT is made and entered into as of the _____ day of ________________, 20__, between Raven Industries, Inc., a South Dakota corporation (the “Company”) and ______________________ (“Employee”).
BACKGROUND
     A. Employee has either been hired to serve as an employee to the Company or the Company desires to induce Employee to continue to serve the Company as an employee.
     B. The Company has adopted the 2010 Stock Incentive Plan (the “Plan”) pursuant to which shares of common stock of the Company have been reserved for issuance under the Plan.
     NOW, THEREFORE, the parties hereto agree as follows:
     1. Grant of Option; Purchase Price. Subject to the terms and conditions herein set forth, the Company hereby irrevocably grants from the Plan to Employee the right and option, hereinafter called the “Option”, to purchase all or any part of an aggregate of the number of shares of common stock, $1.00 par value, of the Company (the “Shares”) set forth at the end of this Agreement after “Number of Shares” at the price per Share set forth at the end of this Agreement after “Purchase Price.”
     2. Exercise and Vesting of Option. The Option shall be exercisable only to the extent that all, or any portion thereof, has vested in Employee. Except as provided herein in Section 4, the Options shall vest in Employee in four (4) cumulative installments, with twenty-five percent (25%) of the total grant becoming exercisable on the first anniversary of the date of this Agreement, with an additional twenty-five percent (25%) of the total grant becoming exercisable on each of the next three (3) successive anniversaries of such date (each such date is hereinafter referred to singularly as a “Vesting Date” and collectively as “Vesting Dates”), so long as Employee remains an employee of the Company or has elected “Retirement” (as defined below) from the Company after the first anniversary of the date of this Agreement.
     3. Termination of Employment. Except as provided in Section 5(a) below, in the event that Employee ceases to be employed by the Company, for any reason or no reason, with or without cause, prior to any Vesting Date, that part of the Option scheduled to vest on such Vesting Date, and all parts of the Option scheduled to vest in the future, shall not vest and all of Employee’s rights to and under such non-vested parts of the Option shall terminate.
     4. Term of Option. To the extent vested, and except as otherwise provided in this Agreement, the Option shall be exercisable for five (5) years from the date of this Agreement (the “term”); provided, however, that, except as provided in Section 5(a) below, in the event Employee ceases to be employed by the Company, for any reason or no reason, Employee or

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his/her legal representative shall have three (3) months from the date of such termination of his/her position as an employee to exercise any part of the Option vested pursuant to Section 3 of this Agreement. Upon the expiration of such three (3) month period, except as provided in Section 5(a) or, if earlier, upon the expiration date of the Option as set forth above, the Option shall terminate and become null and void.
     5. Retirement or Death of Employee.
     (a) “Retirement” is defined as Employee voluntarily terminating employment with the Company on the first day of any month after Employee’s years of service, plus his/her attained age, equals or exceeds the sum of 80. Notwithstanding anything to the contrary contained herein, in the event of Employee’s Retirement after the first anniversary of the date of this Agreement, the Option shall, to the extent not exercised, continue to vest as provided in Section 3 hereof and shall be exercisable through the full term of the Option. Employee acknowledges that any exercise of the Option more than three (3) months after a Retirement will likely result in the Option being treated as non-qualified under federal tax law and may result in additional tax payments by Employee.
     (b) In the event of Employee’s death, the person designated in Employee’s will, or in the absence of such designation, Employee’s legal representative may, in like manner, exercise the Option to the extent of the number of Shares which were vested at the time of his/her death, but such right shall expire unless exercised by such designated person or legal representative within the earlier of (i) three (3) months after the death of Employee, or (ii) the expiration of the Option.
     6. Method of Exercising Option. Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by written notice to the Company. Such notice shall state the election to exercise the Option and the number of Shares in respect of which it is being exercised, and shall be signed by the person or persons so exercising the Option. Such notice shall be accompanied by payment of the full purchase price of such Shares, in which event the Company shall deliver a certificate or certificates representing such Shares as soon as practicable after the notice shall be received. Payment of such purchase price may take the form of cash, shares of stock of the Company, the total market value of which equals the total purchase price, or any combination of cash and shares of the Company, the total market value of which equals the total purchase price. In the event that the Option becomes “non-qualified” under Section 5(a), Employee may deliver additional Shares to satisfy Employee’s minimum statutory tax withholding requirements with respect to any exercise of the Option. Any such notice shall be deemed given when received by the Company at its principal place of business. All Shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable.
     7. Rights of Option Holder. Employee, as holder of the Option, shall not have any of the rights of a shareholder with respect to the Shares covered by the Option except to the

2


 

extent that one or more certificates for such Shares shall be delivered to him or her upon the due exercise of all or any part of the Option.
     8. Incentive Stock Option. Subject to Section 5(a) hereof, the Company intends that the Option shall be an incentive stock option governed by the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). The terms of the Plan and the Option shall be interpreted and administered so as to satisfy the requirements of the Code.
     9. Limitations on Transferability. The Option shall not be transferred, pledged or otherwise assigned; and the Company shall not be required to recognize any attempted assignment of the Option. Notwithstanding the preceding sentence, the Option may be transferred, in the event of Employee’s death, by will or the laws of descent and distribution to the limited extent provided in the Plan, or otherwise transferred consistent with the Plan and treatment of the Option as an incentive stock option pursuant to the Code. During Employee’s lifetime, the Option may be exercised only by him or her, by his or her guardian or legal representative or by any transferee permitted by this Section 9.
     10. No Continued Employment or Right to Corporate Assets. Nothing contained in this Agreement shall be deemed to grant Employee any right to continue in the employ of the Company for any period of time or to any right to continue his or her present or any other rate of compensation, nor shall this Agreement be construed as giving Employee, Employee’s beneficiaries or any other person any equity or interests of any kind in the assets of the Company or creating a trust of any kind or a fiduciary relationship of any kind between the Company and any such person.
     11. Securities Law Matters. Employee acknowledges that the Shares to be received by him or her upon exercise of the Option may not have been registered under the Securities Act of 1933 or the Blue Sky laws of any state (collectively, the “Acts”). If such Shares have not been so registered, Employee acknowledges and understands that the Company is under no obligation to register, under the Acts, the Shares received by him or her or to assist him or her in complying with any exemption from such registration if he or she should at a later date wish to dispose of the Shares. Employee acknowledges that if not then registered under the Acts, the Shares shall bear a legend restricting the transferability thereof, such legend to be substantially in the following form:
“The shares represented by this certificate have not been registered or qualified under federal or state securities laws. The shares may not be offered for sale, sold, pledged or otherwise disposed of unless so registered or qualified, unless an exemption exists or unless such disposition is not subject to the federal or state securities laws, and the Company may require that the availability or any exemption or the inapplicability of such securities laws be established by an opinion of counsel, which opinion of counsel shall be reasonably satisfactory to the Company.”
     12. Employee Representations. Employee hereby represents and warrants that Employee has reviewed with his/her own tax advisors the federal, state, and local tax

3


 

consequences of the transactions contemplated by this Agreement. Employee is relying solely on such advisors and not on any statements or representation of the Company or any of its agents. Employee understands that he or she will be solely responsible for any tax liability that may result to him or her as a result of the transactions contemplated by this Agreement. The Option, if exercised, will be exercised for investment and not with a view to the sale or distribution of the Shares to be received upon exercise thereof. Employee agrees to hold stock acquired by exercise of this Option for a period of one year or to notify the Company in writing of the date of disposition and the sale price of the shares.
     13. General.
     (a) The Option is granted pursuant to the Plan and is governed by the terms thereof. In the event of any conflict between the terms of this Option Agreement and the terms of the Plan, the terms of the Plan shall control. The Company shall at all times during the term of the Option reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of this Option Agreement.
     (b) Nothing herein expressed or implied is intended or shall be construed as conferring upon or giving to any person, firm, or corporation other than the parties hereto, any rights or benefits under or by reason of this Agreement.
     (c) Each party hereto agrees to execute such further documents as may be necessary or desirable to effect the purposes of this Agreement.
     (d) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
     (e) This Agreement, in its interpretation and effect, shall be governed by the laws of the State of South Dakota applicable to contracts executed and to be performed therein.
[Signature page follows]

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[Signature page to Incentive Stock Option Agreement]
     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
             
NUMBER OF SHARES:   RAVEN INDUSTRIES, INC.
 
           
XXXX
  By        
 
           
 
      Its President & CEO    
 
           
PURCHASE PRICE:   EMPLOYEE:
 
           
$XX.xx / per share
           
 
           
 
           
             
 
  DATE:        
 
           

5

exv10w2
Exhibit 10.2
RAVEN INDUSTRIES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT

(Employee)
     This STOCK OPTION AGREEMENT is made and entered into as of the ___day of                     , 20___, between Raven Industries, Inc., a South Dakota corporation (the “Company”) and                      (“Employee”).
BACKGROUND
     A. Employee has either been hired to serve as an employee to the Company or the Company desires to induce Employee to continue to serve the Company as an employee.
     B. The Company has adopted the 2010 Stock Incentive Plan (the “Plan”) pursuant to which shares of common stock of the Company have been reserved for issuance under the Plan.
     NOW, THEREFORE, the parties hereto agree as follows:
     1. Grant of Option; Purchase Price. Subject to the terms and conditions herein set forth, the Company hereby irrevocably grants from the Plan to Employee the right and option, hereinafter called the “Option”, to purchase all or any part of an aggregate of the number of shares of common stock, $1.00 par value, of the Company (the “Shares”) set forth at the end of this Agreement after “Number of Shares” at the price per Share set forth at the end of this Agreement after “Purchase Price.”
     2. Exercise and Vesting of Option. The Option shall be exercisable only to the extent that all, or any portion thereof, has vested in Employee. Except as provided herein in Section 4, the Options shall vest in Employee in four (4) cumulative installments, with twenty-five percent (25%) of the total grant becoming exercisable on the first anniversary of the date of this Agreement, with an additional twenty-five percent (25%) of the total grant becoming exercisable on each of the next three (3) successive anniversaries of such date (each such date is hereinafter referred to singularly as a “Vesting Date” and collectively as “Vesting Dates”), so long as Employee remains an employee of the Company or has elected “Retirement” (as defined below) from the Company after the first anniversary of the date of this Agreement.
     3. Termination of Employment. Except as provided in Section 5(a) below, in the event that Employee ceases to be employed by the Company, for any reason or no reason, with or without cause, prior to any Vesting Date, that part of the Option scheduled to vest on such Vesting Date, and all parts of the Option scheduled to vest in the future, shall not vest and all of Employee’s rights to and under such non-vested parts of the Option shall terminate.
     4. Term of Option. To the extent vested, and except as otherwise provided in this Agreement, the Option shall be exercisable for five (5) years from the date of this Agreement (the “term”); provided, however, that, except as provided in Section 5(a) below, in the event Employee ceases to be employed by the Company, for any reason or no reason, Employee or his/her legal representative shall have three (3) months from the date of such termination of his/her position as

1


 

an employee to exercise any part of the Option vested pursuant to Section 3 of this Agreement. Upon the expiration of such three (3) month period, except as provided in Section 5(a), or, if earlier, upon the expiration date of the Option as set forth above, the Option shall terminate and become null and void.
     5. Retirement or Death of Employee.
     (a) “Retirement” is defined as Employee voluntarily terminating employment with the Company on the first day of any month after Employee’s years of service, plus his/her attained age, equals or exceeds the sum of 80. Notwithstanding anything to the contrary contained herein, in the event of Employee’s Retirement after the first anniversary of the date of this Agreement, the Option shall, to the extent not exercised, continue to vest as provided in Section 3 hereof and shall be exercisable through the full term of the Option.
     (b) In the event of Employee’s death, the person designated in Employee’s will, or in the absence of such designation, Employee’s legal representative may, in like manner, exercise the Option to the extent of the number of Shares which were vested at the time of his/her death, but such right shall expire unless exercised by such designated person or legal representative within the earlier of (i) three (3) months after the death of Employee, or (ii) the expiration of the Option.
     6. Method of Exercising Option. Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by written notice to the Company. Such notice shall state the election to exercise the Option and the number of Shares in respect of which it is being exercised, and shall be signed by the person or persons so exercising the Option. Such notice shall be accompanied by payment of the full purchase price of such Shares, in which event the Company shall deliver a certificate or certificates representing such Shares as soon as practicable after the notice shall be received. Payment of such purchase price may take the form of cash, shares of stock of the Company, the total market value of which equals the total purchase price, or any combination of cash and shares of the Company, the total market value of which equals the total purchase price. Employee may deliver additional Shares to satisfy Employee’s minimum statutory tax withholding requirements with respect to any exercise of the Option. Any such notice shall be deemed given when received by the Company at its principal place of business. All Shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable.
     7. Rights of Option Holder. Employee, as holder of the Option, shall not have any of the rights of a shareholder with respect to the Shares covered by the Option except to the extent that one or more certificates for such Shares shall be delivered to him or her upon the due exercise of all or any part of the Option.
     8. Limitations on Transferability. The Option shall not be transferred, pledged or assigned except, in the event Employee’s death, by will or the laws of descent and distribution to the limited extent provided in the Plan, or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended (the “Code”) or Title I of the Employee Retirement Income Security Act, or the rules there under, and the Company shall not be required to recognize

2


 

any attempted assignment of such rights. Notwithstanding the preceding sentence, the Option may be transferred by Employee to Employee’s spouse, children, grandchildren or parents (collectively, the “Family Members”), to trusts for the benefit of Family Members, to partnerships or limited liability companies in which Family Members are the only partners or shareholders, or to entities exempt from federal income taxation pursuant to Section 501(c)(3) of the Code. During Employee’s lifetime, the Option may be exercised only by him or her, by his/her guardian or legal representative or by the transferees permitted by the preceding sentence.
     9. No Continued Employment or Right to Corporate Assets. Nothing contained in this Agreement shall be deemed to grant Employee any right to continue in the employ of the Company for any period of time or to any right to continue his/her present or any other rate of compensation, nor shall this Agreement be construed as giving Employee, Employee’s beneficiaries or any other person any equity or interests of any kind in the assets of the Company or creating a trust of any kind or a fiduciary relationship of any kind between the Company and any such person.
     10. Securities Law Matters. Employee acknowledges that the Shares to be received by him or her upon exercise of the Option may not have been registered under the Securities Act of 1933 or the Blue Sky laws of any state (collectively, the “Acts”). If such Shares have not been so registered, Employee acknowledges and understands that the Company is under no obligation to register, under the Acts, the Shares received by him or her or to assist him or her in complying with any exemption from such registration if he or she should at a later date wish to dispose of the Shares. Employee acknowledges that if not then registered under the Acts, the Shares shall bear a legend restricting the transferability thereof, such legend to be substantially in the following form:
     “The shares represented by this certificate have not been registered or qualified under federal or state securities laws. The shares may not be offered for sale, sold, pledged or otherwise disposed of unless so registered or qualified, unless an exemption exists or unless such disposition is not subject to the federal or state securities laws, and the Company may require that the availability or any exemption or the inapplicability of such securities laws be established by an opinion of counsel, which opinion of counsel shall be reasonably satisfactory to the Company.”
     11. Employee Representations. Employee hereby represents and warrants that Employee has reviewed with his/her own tax advisors the federal, state, and local tax consequences of the transactions contemplated by this Agreement. Employee is relying solely on such advisors and not on any statements or representation of the Company or any of its agents. Employee understands that he or she will be solely responsible for any tax liability that may result to him or her as a result of the transactions contemplated by this Agreement. The Option, if exercised, will be exercised for investment and not with a view to the sale or distribution of the Shares to be received upon exercise thereof.

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     12. General.
     (a) The Option is granted pursuant to the Plan and is governed by the terms thereof. In the event of any conflict between the terms of this Option Agreement and the terms of the Plan, the terms of the Plan shall control. The Company shall at all times during the term of the Option reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of this Option Agreement.
     (b) Nothing herein expressed or implied is intended or shall be construed as conferring upon or giving to any person, firm, or corporation other than the parties hereto, any rights or benefits under or by reason of this Agreement.
     (c) Each party hereto agrees to execute such further documents as may be necessary or desirable to effect the purposes of this Agreement.
     (d) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
     (e) This Agreement, in its interpretation and effect, shall be governed by the laws of the State of South Dakota applicable to contracts executed and to be performed therein.
[Signature page follows]

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[Signature page to Non-Qualified Stock Option Agreement]
     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
             
NUMBER OF SHARES:   RAVEN INDUSTRIES, INC.
 
           
x,xxx
  By        
 
           
 
      Its President & CEO    
 
           
PURCHASE PRICE:   EMPLOYEE:
 
           
$xx.xx/per share
           
 
           
 
           
             
 
  DATE:        
 
           

5

exv31w1
Exhibit 31.1
CERTIFICATION OF CEO PURSUANT TO
SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Daniel A. Rykhus, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Raven Industries, Inc. (the “Registrant”);
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.   The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.   The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or others performing the equivalent function):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls over financial reporting.
         
     
Date: September 2, 2010  /s/ Daniel A. Rykhus    
  Daniel A. Rykhus   
  President and Chief Executive Officer   

 

exv31w2
         
Exhibit 31.2
CERTIFICATION OF CFO PURSUANT TO
SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Thomas Iacarella, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Raven Industries, Inc. (the “Registrant”);
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.   The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.   The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or others performing the equivalent function):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls over financial reporting.
         
     
Date: September 2, 2010  /s/ Thomas Iacarella    
  Thomas Iacarella   
  Vice President and Chief Financial Officer   

 

exv32w1
         
Exhibit 32.1
RAVEN INDUSTRIES, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
The undersigned, Daniel A. Rykhus, the President and Chief Executive Officer of Raven Industries, Inc., has executed this Certification in connection with the filing with the Securities and Exchange Commission of Raven Industries, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2010 (the “Report”).
The undersigned hereby certifies, to his knowledge, that:
    the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
    the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Raven Industries, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Certification as of the 2nd day of September 2010.
         
     
  /s/ Daniel A. Rykhus    
  Daniel A. Rykhus   
  President and Chief Executive Officer   

 

exv32w2
         
Exhibit 32.2
RAVEN INDUSTRIES, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
The undersigned, Thomas Iacarella, the Vice President and Chief Financial Officer of Raven Industries, Inc., has executed this Certification in connection with the filing with the Securities and Exchange Commission of Raven Industries, Inc.’s Annual Report on Form 10-Q for the fiscal quarter ended July 31, 2010 (the “Report”).
The undersigned hereby certifies, to his knowledge, that:
    the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
    the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Raven Industries, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Certification as of the 2nd day of September 2010.
         
     
  /s/ Thomas Iacarella    
  Thomas Iacarella   
  Vice President and Chief Financial Officer