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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

OR

For the transition period from                                                               

Commission file number: 0-3136

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.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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RAVEN INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

Table of Contents

PART I — FINANCIAL INFORMATION
 
RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)

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

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PART I — FINANCIAL INFORMATION

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
(Dollars in thousands, except per share data)

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

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PART I — FINANCIAL INFORMATION

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(Dollars in thousands)

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

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PART I — FINANCIAL INFORMATION

RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.		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 representation have been included. Financial results for the interim three and six-month periods are not necessarily indicative of the results that may be expected for the year ending January 31, 2003. The January 31, 2002 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, 2002.
2.		Details of the earnings per share computation are presented below:

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PART I — FINANCIAL INFORMATION

RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3.

The company’s reportable segments are defined by their common technologies, production processes and inventories. These segments are consistent with the company’s management reporting structure. The company measures the performance of its segments based on their operating income exclusive of administrative and general expenses. The results of these segments are shown on the following table:

4.		The company incurred approximately $351,000 of inventory write-downs, severance and facility relocation costs in the six-months ended July 31, 2001 related to the repositioning of its Beta Raven Industrial Controls Division, including the closing of its Alabama plant. This charge was included in the Sold businesses segment.
5.		The company recorded a net pretax gain of $345,000 on the sale of assets during the three months ended July 31, 2001, primarily related to the May 2001 sale of a warehouse included in the Aerostar segment.
6.		The company sold its Beta Raven Industrial Controls Division to California Pellet Mill as of May 31, 2002, recording a pretax gain of $104,000 in the three and six-month periods ended July 31, 2002. The cash proceeds of the sale were $577,000 and the buyers also assumed certain liabilities of the company.
7.		In July 2002, the company entered into a new agreement with Wells Fargo Bank South Dakota, N.A. (Wells Fargo) to renew its short-term credit line of $5.0 million. The terms of this agreement are similar to the $5.0 million line with Wells Fargo that expired on June 30, 2002. On July 31, 2002, the company had no borrowings outstanding under this line of credit. In

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PART I — FINANCIAL INFORMATION

RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		addition, the agreement included a $2.0 million credit facility primarily to support self-insured workers compensation bonding requirements.
		In July 2002, Aerostar International, Inc. (a subsidiary of Raven Industries, Inc.) entered into a new agreement with Wells Fargo for a short-term credit line of $2.0 million that expires in June 2003. The terms of this agreement are similar to the $2.0 million line with Wells Fargo that expired on June 30, 2002. On July 31, 2002, Aerostar International had borrowings of $575,000 outstanding under this line of credit and the interest rate on these borrowings was 4.75%.
8.		In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which eliminated the systematic amortization of goodwill. The company adopted SFAS No. 142 on February 1, 2002. Had SFAS No. 142 been effective February 1, 2001, net income and earnings per share for the three and six-months ended July 31 would have been reported as the following amounts:

	The changes in the carrying amount of goodwill for the six months ended July 31, 2002 are as follows:

	The company completed its transitional impairment testing of goodwill and concluded there was no impairment of goodwill.

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PART I — FINANCIAL INFORMATION

RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

	Balances of intangible assets as of July 31, 2002 were as follows:

	Estimated aggregate amortization expense based on the current carrying value of amortizable intangible assets for the five fiscal years is as follows:

9.		Effective February 1, 2002, the company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This standard expands upon the fundamental provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” It also broadens the presentation of discontinued operations to include disposals of assets below the segment level. The company is in the process of finalizing the policy for the periodic testing for impairment of long-lived assets.
10.		In June 2002, the Financial Accounting Standards Board issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are required to be effective for exit or disposal activities that are initiated after December 31, 2002, although early adoption is encouraged. The company intends to adopt Statement No. 146 effective with exit or disposal activities initiated after July 31, 2002.
11.		The company will begin expensing the fair value of employee stock options with the next annual grant in November 2002. Under existing accounting rules, the change in accounting for options is expected to reduce the company’s fiscal 2003 net income by less than one cent per share; the expense is anticipated to increase gradually to approximately four cents per share over the next four years, as additional options are granted.

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PART I — FINANCIAL INFORMATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

The company’s cash and cash equivalents balance of $12.5 million at July 31, 2002 was $5.1 million less than at July 31, 2001. On December 5, 2001, the company acquired the operating assets and certain liabilities of Starlink, Incorporated and System Integrators, Inc. for cash of $8.7 million. Inventory levels decreased slightly by $263,000 from July 31, 2001 to July 31, 2002. Increases in inventory balances for the Electronic Systems and Flow Controls segments due to acquisitions were offset by decreases in the Aerostar segment and sold businesses. At July 31, 2002, the company retained a $5.0 million line of credit and its Aerostar subsidiary retained an unused balance of $1.4 million on its seasonal line of credit. The company’s capital resources continue to be sufficient to fund all its activities.

Net cash provided by operations was $8.9 million through the six-month period ended July 31, 2002. This compared to $13.0 million of net cash provided by operations for the comparable period one-year earlier. An increase of $1.5 million in earnings was more than offset by lower accounts receivable collections during the six-month period and lower accounts payable levels. Accounts receivable, after adjusting for businesses acquired and sold, decreased $2.7 million as compared to a decrease of $6.0 million in the prior year’s comparable period. Approximately $2.0 million of the prior year’s accounts receivable collections were related to the company’s Tacoma, Washington plastic tank operation, which was closed in November 2001. Accounts payable, after adjusting for businesses acquired and sold, decreased $1.7 million as compared to a $423,000 increase a year ago. The decrease in the accounts payable balance as of July 31, 2002 was primarily due to the timing of payments.

RESULTS OF OPERATIONS

Sales of $29.7 million for the quarter ended July 31, 2002 were $1.5 million higher when compared to the second quarter of last year. Increases in the Electronic Systems and Flow Controls segments were somewhat offset by decreases in sales from the sold businesses and the Aerostar segment. For the six-month period, sales of $60.7 million were up 3 percent when compared to the previous year’s reported sales of $59.1 million. Selling, general and administrative expenses for the current year’s second quarter were virtually unchanged at $2.6 million when compared to the previous year’s second quarter. Operating income of $3.5 million for the second quarter was $512,000 above the three months ended July 31, 2001. Improved margins in the Engineered Films and Electronic Systems segments increased profits for the current year’s second quarter. The company also reported a $104,000 pretax gain on the sale of its Beta Raven Industrial Controls Division, which was sold as of May 31, 2002. Last fiscal year’s second quarter included a $345,000 net pretax gain, consisting primarily of the sale of an Aerostar warehouse. Fiscal year-to-date operating income of $8.8 million was $2.5 million above the same period last year. Strong profit margins in the Engineered Films and Flow Controls segments contributed to the higher level of profitability in the first six months of the current year. Net income for the second quarter increased by 14 percent from one year earlier to $2.3 million, resulting in record earnings of 49 cents per diluted share. For the first six months, net income increased 36 percent to $5.8 million, or $1.23 per diluted share, when compared to the prior year.

Flow Controls sales of $4.2 million for the second quarter were $1.3 million higher than in the same period last year. Sales for the first half of fiscal 2003 were $15.9 million, a 48 percent increase from the first half of fiscal 2002. Strong demand for new products and the impact of the company’s Starlink acquisition accounted for the sales increases. Second quarter operating results which were slightly below breakeven compared to a $216,000 profit recorded in last year’s second quarter. The second quarter is the seasonal low point for sales in the Flow Controls segment and profits are lower due to the segment’s high fixed-cost base. The acquisition of Starlink in December 2001 intensified this seasonal pattern, generating an operating loss in the second quarter. Operating income for the six months ended July 31, 2002 was $4.2 million, an increase of $1.6 million from the previous year. Increased sales volume for the first half of the

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PART I — FINANCIAL INFORMATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

fiscal year was the main factor generating the higher operating income level for the Flow Controls segment.

Engineered Films second quarter sales increased to $11.1 million from $10.8 million in the same period last year. Six-month sales of $19.4 million were 4 percent below the first six months of fiscal 2002 due to a decrease in sales of pit liners for oil exploration and a depressed manufactured housing market. Second quarter operating income of $3.6 million was 26 percent above the $2.8 million reported in the second quarter of fiscal 2002. Despite the lower sales volume for the first half of the year, operating income rose to $6.0 million, an increase of 17 percent over the prior year. Lower raw material costs and improved product mix have contributed to increased profits for the first six months of fiscal 2003.

Electronic Systems sales for the second quarter increased to $10.9 million from $8.9 million in the same period last year. Year-to-date sales of $18.4 million were 13 percent above the previous year’s $16.2 million. The higher sales level was due to increased shipments on the segment’s largest contracts. Second quarter operating income increased to $1.2 million, a 53 percent improvement over the prior year. For the first six months, operating income was $1.4 million, a 52 percent increase over the first half of fiscal 2002. Improved operating income results for the three and six-month periods reflect the higher sales level and improved operational efficiencies of the segment.

Aerostar second quarter sales of $3.2 million were 21 percent below last year’s second quarter, a decrease of $831,000. For the first six months of the year, sales totaled $5.7 million, down 25 percent from the prior year. A soft hot-air balloon market and continued pressure from low-cost offshore apparel manufacturers negatively affected the three and six-month sales levels. The lower sales levels, along with unfavorable adjustments to inventory values as a result of declining sales, resulted in operating losses of $107,000 and $298,000 for the three and six-month periods, respectively. The prior year’s second quarter and first half operating results also included a pretax gain of $410,000 on the sale of a warehouse.

Second quarter sales for businesses sold totaled $253,000, all of which were from the company’s Beta Raven Industrial Controls Division which was sold as of May 31, 2002. For the second quarter ended July 31, 2001, Beta Raven Industrial Controls Division recorded $475,000 of sales. Plastic Tank Division sales were $1.0 million in the prior year’s second quarter. This operation was closed in November 2001. For the first half of the fiscal year, sales for businesses sold totaled $1.3 million compared to $4.3 million reported in the first six months of the prior year. Second quarter operating income for sold businesses of $59,000 included the $104,000 pretax gain on the sale of the Beta Raven Industrial Controls Division. Operating income for the six months ended July 31, 2002 was $129,000 compared to an operating loss of $731,000 the previous year. The Beta Raven Industrial Controls Division incurred a $351,000 repositioning charge in the first half of fiscal 2002.

The results for the three and six-months ended July 31, 2002 and July 31, 2001 include nonrecurring items that the company does not believe are relevant to future operations or cash flows. Therefore, the company has segregated its ongoing operations in the following tables. Ongoing operations exclude the operations of and gains from the sale of the Plastic Tank Division which was partially sold in August 2000 and closed in November 2001, as well as gains on the sale of assets recorded in fiscal 2002. Ongoing operations also exclude the results of the Industrial Controls Division of Beta Raven and the gain resulting from its sale in the second quarter of fiscal 2003. Ongoing results exclude the nonrecurring gains and losses related to repositioning the company’s businesses. The items excluded from ongoing results cause this presentation to not be in conformity with accounting principles generally accepted in the United States of America.

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PART I — FINANCIAL INFORMATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents ongoing operation information for the three and six-month periods ended July 31, 2002 and July 31, 2001: