General
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 to customers throughout North America. The company 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 1,000 persons 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 and which is available on the website. Information on the company’s website is not part of this filing.
The company has four business segments consisting of three Raven divisions and one subsidiary: Applied Technology Division (formerly known as the Flow Controls Division), Engineered Films Division, Electronic Systems Division, and Aerostar International, Inc. (Aerostar). 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. Note 11 on page 42 of the company’s Annual Report to Shareholders, incorporated herein by reference, provides financial information concerning the business segments.
Business Segments
Applied Technology
Effective February 1, 2009, the company’s Flow Controls segment changed its name to 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 February 2005, the company acquired the assets of Montgomery Industries, Inc., a privately-held Saskatchewan, Canada company, to expand its precision agriculture product base and its international presence.
Home office personnel sell agricultural control products to original equipment manufacturers (OEMs) and independent third-party distributors. The segment also markets using on-site precision agriculture representatives in key geographic areas. 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 $3.1 million in fiscal 2009, $4.0 million in fiscal 2008 and $13.3 million in fiscal 2007.
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, 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 to choose from.
Aerostar
Aerostar sells high altitude aerostats for government and commercial research and military parachutes. It produces uniforms and protective wear for US government agencies as a subcontractor and 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.
Major Customer Information
Sales in fiscal 2009 and 2008 to Goodrich Corporation, a customer of the Electronic Systems segment, accounted for 13% and 11%, respectively, of consolidated sales. At January 31, 2009, Goodrich Corporation accounted for 18% of the company’s consolidated accounts receivable. The loss of this account would adversely affect profitability; however, the company believes its relationship with this customer is strong.
Seasonal Working Capital Requirements
Some seasonal demand exists in Applied Technology’s agricultural market. The Applied Technology Division builds product in the fall for winter/spring delivery. Certain sales to agricultural customers offer spring dating terms for fall and early winter shipments. The resulting fluctuations in inventory and accounts receivable balances may require, and have required, seasonal short-term financing.
Financial Instruments
The principal financial instruments 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 as described in Note 8 to the consolidated financial statements located on page 40 of the 2009 Annual Report to Shareholders incorporated herein by reference. As discussed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, 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 numerous 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. In fiscal 2007, because this segment has few long-term sales contracts, price increases were passed on to customers. In fiscal 2009 and 2008, price increases could not be passed on to customers due to weak demand and a more competitive pricing environment. With the exception of plastic resin price volatility, the company has not experienced any significant shortages or other problems in purchasing raw materials to date, and alternative sources of supply are generally available. 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 and manufacturing skills.
Backlog
As of February 1, 2009, the company’s order backlog totaled $80.4 million. Backlog amounts as of February 1, 2008 and 2007 were $66.6 million and $44.2 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.