e10vq

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 October 31, 2005


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: 0-3136

RAVEN INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


South Dakota		46-0246171
(State of incorporation)		(IRS Employer Identification No.)

205 East 6^th 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)

Indicate by check mark (“x”) 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 (“x”) whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). þ Yes o No

Indicate by check mark (“x”) whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of November 29, 2005 there were 18,062,640 shares of common stock of Raven Industries, Inc. outstanding. There were no other classes of stock outstanding.

PART I — FINANCIAL INFORMATION

RAVEN INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands except share data)


ASSETS	Oct 31, 2005			Jan 31, 2005			Oct 31, 2004
Cash and cash equivalents	$	9,715		$	6,619		$	4,903
Short-term investments		2,500			3,000			4,000
Accounts receivable, net of allowance for doubtful accounts of $272, $265 and $265, respectively		29,435			25,370			24,293
Inventories:
Materials		19,167			16,958			16,093
In process		3,671			2,820			2,793
Finished goods		2,620			3,537			3,387

Total inventories		25,458			23,315			22,273
Deferred income taxes		1,565			1,465			1,328
Prepaid expenses and other current assets		1,644			1,823			1,513

Total current assets		70,317			61,592			58,310


Property, plant and equipment		56,904			52,754			50,188
Accumulated depreciation		(34,792	)		(32,790	)		(32,730	)

Property, plant and equipment, net		22,112			19,964			17,458
Goodwill		6,367			5,933			5,933
Amortizable intangible assets, net		2,446			195			222
Investment in unconsolidated affiliate		646			650			—
Other assets, net		287			175			174

Total assets	$	102,175		$	88,509		$	82,097


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current portion of long-term debt	$	11		$	57		$	70
Accounts payable		8,623			10,322			6,280
Accrued 401(k) contribution		874			980			831
Income taxes payable		1,304			567			335
Customer advances		816			855			265
Accrued liabilities		8,641			8,169			8,223

Total current liabilities		20,269			20,950			16,004

Long-term debt, less current portion		12			—			5
Other liabilities, primarily compensation and benefits		1,461			1,477			1,383

Total liabilities		21,742			22,427			17,392


Commitments and contingencies

Shareholders’ equity:
Common stock, $1 par value, authorized shares 100,000,000; issued 32,161,526; 32,052,854; 32,025,866, respectively		32,162			32,053			32,026
Paid in capital		1,030			765			566
Retained earnings		89,973			74,964			72,313
Accumulated other comprehensive income		6			—			—

		123,171			107,782			104,905

Less treasury stock, at cost, 14,099,186; 14,053,386; and 13,976,886 shares, respectively		42,738			41,700			40,200

Total shareholders’ equity		80,433			66,082			64,705

Total liabilities and shareholders’ equity	$	102,175		$	88,509		$	82,097

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

RAVEN INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands except per share data)


	For the Three Months						For the Nine Months
	Ended						Ended
	Oct 31, 2005			Oct 31, 2004			Oct 31, 2005			Oct 31, 2004
Net sales	$	54,135		$	48,597		$	150,143		$	124,082

Cost of sales		39,922			35,635			109,887			90,683


Gross profit		14,213			12,962			40,256			33,399

Selling, general and administrative expenses		3,645			3,581			11,213			9,916
Loss on disposition of businesses and assets		—			1,282			40			1,282


Operating income		10,568			8,099			29,003			22,201

Interest expense		1			14			35			30
Other income, net		(68	)		(30	)		(156	)		(96	)


Income before income taxes		10,635			8,115			29,124			22,267

Income taxes		3,766			2,921			10,324			8,016


Net income	$	6,869		$	5,194		$	18,800		$	14,251


Net income per common share:

Basic	$	0.38		$	0.29		$	1.04		$	0.79
Diluted	$	0.37		$	0.28		$	1.03		$	0.77

Cash dividend paid per common share:
Quarterly	$	0.07		$	0.055		$	0.21		$	0.165
Special		—			—			—			0.625

Total	$	0.07		$	0.055		$	0.21		$	0.790

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

RAVEN INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	For the Nine Months Ended
	Oct 31, 2005			Oct 31, 2004
Cash flows from operating activities:
Net income	$	18,800		$	14,251
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		3,284			2,468
Amortization		350			378
Loss on disposition of businesses and assets		40			1,282
Deferred income taxes		(455	)		68
Stock compensation expense		183			128
Change in operating assets and liabilities, net of effects from acquisition and disposition of businesses and assets:
Accounts receivable		(3,912	)		(5,860	)
Inventories		(1,998	)		(5,662	)
Prepaid expenses and other current assets		(570	)		(246	)
Operating liabilities		(124	)		3,792
Other operating activities, net		94			158

Net cash provided by operating activities		15,692			10,757


Cash flows from investing activities:
Capital expenditures		(5,409	)		(4,016	)
Acquisition of businesses		(2,803	)		(5	)
Purchase of short-term investments		(2,500	)		(3,000	)
Sale of short-term investments		3,000			3,000
Other investing activities, net		6			—

Net cash used in investing activities		(7,706	)		(4,021	)


Cash flows from financing activities:
Proceeds from borrowing under line of credit		4,500			—
Repayments of borrowing under line of credit		(4,500	)		—
Long-term debt principal payments		(55	)		(54	)
Dividends paid		(3,791	)		(14,308	)
Purchase of treasury stock		(1,038	)		(2,019	)
Other financing activities, net		—			106

Net cash used in financing activities		(4,884	)		(16,275	)


Effect of exchange rate changes on cash		(6	)		—


Net increase (decrease) in cash and cash equivalents		3,096			(9,539	)
Cash and cash equivalents at beginning of period		6,619			14,442

Cash and cash equivalents at end of period	$	9,715		$	4,903


Supplemental cash flow information
Cash paid for:
Income taxes	$	9,288		$	7,129
Interest	$	35		$	14

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

RAVEN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation and Description of Business

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 nine-month periods ended October 31, 2005 are not necessarily indicative of the results that may be expected for the year ending January 31, 2006. The January 31, 2005 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, 2005.

(2) Earnings Per Share

Basic net income per share is computed by dividing net income by the weighted-average common shares 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. Certain outstanding options were excluded from the diluted net income per share calculations because their effect would have been antidilutive, as their exercise prices were greater than the average market price of the company’s common stock during those periods. For the nine-month period ended October 31, 2005, 86,044 shares were excluded. There were no antidilutive shares for the three-month period ended October 31, 2005 and for the three and nine-month periods ended October 31, 2004. Details of the earnings per share computation are presented in the following table:


	For the Three Months				For the Nine Months
	Ended				Ended
	Oct 31, 2005		Oct 31, 2004		Oct 31, 2005		Oct 31, 2004
Net income (in thousands)	$	6,869	$	5,194	$	18,800	$	14,251


Weighted average common shares outstanding		18,058,995		18,077,198		18,050,133		18,083,568
Dilutive impact of stock options		267,061		351,758		261,836		348,408


Weighted average common and common-equivalent shares outstanding		18,326,056		18,428,956		18,311,969		18,431,976


Net income per share:
Basic	$	0.38	$	0.29	$	1.04	$	0.79
Diluted	$	0.37	$	0.28	$	1.03	$	0.77

(3) Segment Reporting

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 sold business segment consists of the operations of businesses sold and the company’s ongoing liability for environmental or legal issues of these businesses. 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:

(in thousands)


	For the Three Months						For the Nine Months
	Ended						Ended
	Oct 31, 2005			Oct 31, 2004			Oct 31, 2005			Oct 31, 2004
Net Sales
Flow Controls	$	12,544		$	10,409		$	37,259		$	30,839
Engineered Films		23,197			18,337			56,734			40,745
Electronic Systems		13,692			14,004			42,313			34,829
Aerostar		4,702			5,847			13,837			17,669

Total	$	54,135		$	48,597		$	150,143		$	124,082


Operating Income (Loss)
Flow Controls	$	3,631		$	1,671		$	10,934		$	8,566
Engineered Films		5,632			5,237			13,935			11,413
Electronic Systems		1,921			1,629			6,914			3,104
Aerostar		805			1,152			2,162			3,706
Sold Business		—			—			(40	)		—

Total Segment Income		11,989			9,689			33,905			26,789
Administrative and general expenses		(1,421	)		(1,590	)		(4,902	)		(4,588	)

Total	$	10,568		$	8,099		$	29,003		$	22,201

(4) Financing Transactions

The company has an uncollateralized credit agreement providing a line of credit of $8.0 million with a maturity date of June 1, 2006 bearing interest at 0.25% under the prime rate. Letters of credit totaling $2.0 million have been issued under the line, primarily to support self-insured workers compensation bonding requirements. The credit agreement contains certain restrictive covenants that, among other things, require maintenance of certain levels of net worth and working capital. Seasonal short-term borrowings of $4.5 million were required during the first quarter, but were repaid by April 30, 2005. The weighted average interest rate for those borrowings was 5.63%. There were no borrowings outstanding under the credit line as of October 31, 2005, January 31, 2005 or October 31, 2004.

(5) Short-term Investments

At October 31, 2005, the company has invested $2.5 million of excess cash into federally insured certificates of deposit and US Treasury Bills with rates ranging from 3.25% to 3.723%. The investments have varying maturity dates, all of which are less than twelve months.

(6) Dividends

The company announced on November 18, 2005, that its board of directors approved a quarterly cash dividend of 7 cents per share, payable January 13, 2006 to shareholders of record on December 23, 2005.

(7) Acquisition

On February 17, 2005, the company acquired substantially all of the assets of Montgomery Industries, Inc., a privately held Canadian corporation, for $2.7 million in cash plus the assumption of certain liabilities and a quarterly payment of six percent on future sales of Montgomery products up to a maximum payment of $1.825 million. Montgomery has developed and sold an automatic boom height control system under the name “Autoboom” for agricultural sprayers designed to successfully maintain optimum boom height in uneven terrain without compromising the speed with which the sprayer can be operated. Of the purchase price, $289,000 was allocated to current assets, $82,000 was allocated to property, plant and equipment, $2.560 million was allocated to amortizable intangible assets (to be amortized over approximately seven years), $539,000 to current liabilities assumed and $285,000 to goodwill, which is fully deductible for tax purposes.

For the nine-month period ended October 31, 2005, the earn-out on the sales of Montgomery products was $149,000, which was recorded as an increase to goodwill.

The operation is a component of the Flow Controls segment. The results of operations for the acquired business have been included in the consolidated financial statements since the date of acquisition. Pro forma earnings are not presented due to the immateriality of the acquisition to the company’s consolidated operations.

(8) Foreign Currency

The Canadian dollar is considered the functional currency of the Canadian operations.

The balance sheet of the Canadian subsidiary is translated into U.S. dollars at period-end exchange rates, while statement of earnings are translated at average rates. 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 (expense) in the Consolidated Statement of Income.

(9) Comprehensive Income

Pursuant to the provisions of SFAS No. 130, “Reporting Comprehensive Income,” comprehensive income includes all changes to shareholders’ equity during a period, except those resulting from investment by and distributions to shareholders. Components of comprehensive income for the company include net income and changes in foreign currency translation adjustments. Total comprehensive income was as follows:

(in thousands)


	For the Three Months				For the Nine Months
	Ended				Ended
	Oct 31, 2005		Oct 31, 2004		Oct 31, 2005		Oct 31, 2004
Net Income	$	6,869	$	5,194	$	18,800	$	14,251
Foreign currency translation adjustments		19		—		6		—

Total comprehensive income	$	6,888	$	5,194	$	18,806	$	14,251

(10) Product Warranty Costs

Accruals necessary for product warranties are estimated based upon historical warranty costs and average time elapsed between purchases and returns for each division. Any warranty issues that are unusual in nature are accrued individually. Changes in the carrying amount of accrued product warranty costs for the nine months ended October 31, 2005 are summarized as follows:

(in thousands)


Balance at January 31, 2005	$	452
Warranty costs incurred		(590	)
Product warranty accrual		618

Balance at October 31, 2005	$	480

(11) Effect of Recently Issued Accounting Standards

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143.” FIN 47 concludes that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 must be applied for periods ending after December 15, 2005. The adoption of this interpretation is not expected to have a significant effect on the company’s consolidated results of operations or financial position.

In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections”. This new standard replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a significant effect on the company’s consolidated results of operations or financial position.

In June 2005, the FASB Emerging Issues Task Force (EITF) reached a final consensus on EITF 05-6, “Determining the Amortization Period for Leasehold Improvements.” EITF 05-6 addresses the determination of the amortization period for leasehold improvements in operating leases that are either (a) purchased subsequent to the inception of the lease or (b) acquired in a business combination. The provisions of EITF 05-6 are effective for periods beginning after June 30, 2005 and are not expected to have a significant effect on the company’s consolidated results of operations or financial position.

In August 2005, FASB Staff Position FAS No. 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R)” (FSP FAS No. 123(R)-1) was issued. FSP FAS No. 123(R)-1 states that a freestanding financial instrument issued to an employee in exchange for past or future employee services that is subject to SFAS No. 123(R) shall continue to be subject to the recognition and measurement provisions of SFAS No. 123(R) throughout the life of the instrument, unless its terms are modified when the holder is no longer an employee. The guidance in FSP FAS No. 123(R)-1 is effective upon initial adoption of SFAS No. 123(R) on February 1, 2006 and is not expected to have a significant effect on the company’s consolidated results of operations or financial position.

In October 2005, FASB Staff Position FAS No. FAS 123(R)-2, “Practical Accommodation to the Application of the Grant Date as Defined in FASB Statement No. 123(R),” was issued. FSP FAS No. 123(R)-2 provides guidance on determining the grant date for an award as defined in SFAS No. 123(R). This FSP stipulates that assuming all other criteria in the grant date definition are met, a mutual understanding of the key terms and conditions of an award to an individual employee is presumed to exist upon the award’s approval in accordance with the relevant corporate governance requirements, provided that the key terms and conditions of an award (a) cannot be negotiated by the recipient with the employer because the award is a unilateral grant, and (b) are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. The guidance in FSP FAS No. 123(R)-2 is effective upon initial adoption of SFAS No. 123(R) on February 1, 2006 and is not expected to have a significant effect on the company’s consolidated results of operations or financial position.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Raven Industries, Inc. is an industrial manufacturer providing a variety of products to customers within the industrial, agricultural, construction and military/aerospace markets throughout North America. The company operates three divisions (Flow Controls, Engineered Films and Electronic Systems) in addition to two wholly owned subsidiaries, Aerostar International, Inc. (Aerostar) and Raven Industries Canada, Inc. (Raven Canada). Flow Controls, including Raven Canada, provides electronic and Global Positioning System (GPS) products for the precision agriculture, marine navigation and other niche markets. Engineered Films produces rugged reinforced plastic sheeting for industrial, construction, manufactured housing and agriculture applications. Electronic Systems is a total-solutions provider of electronics manufacturing services. Aerostar manufactures military cargo parachutes, government service uniforms, high-altitude research balloons and other large-scale inflatable products.

EXECUTIVE SUMMARY

Earnings for the three months ended October 31, 2005 grew 32.2% to $6.9 million as compared to earnings of $5.2 million for the quarter ended October 31, 2004. Third quarter diluted earnings per share increased nine cents per share from 28 cents to 37 cents. Included in last year’s results was a $1.3 million pre-tax ($820,000 after-tax) write-off of inventory, fixed assets, and intangibles related to the company’s December 2003 acquisition of Fluent Systems, LLC. Excluding the Fluent Systems’ write-down, net income for the current year’s third quarter was up 14.2%. Increased sales in the company’s Engineered Films and Flow Controls segments drove the earnings growth. For the first nine months, net income rose to $18.8 million, a 31.9% increase over one year earlier, while earnings per diluted share reached $1.03, a 26 cent increase over last year’s comparable period. Net income as a percent of sales reached 12.5% for the first nine months, up from 11.5% achieved for last year’s comparable period. The Engineered Films, Electronic Systems, and Flow Controls segments have all contributed to the company’s sales and profit growth for the current year’s nine-month period.

Consolidated sales for the current quarter of $54.1 million were $5.5 million, or 11.4% above sales for the third quarter ended one year earlier. Flow Controls’ sales rose to $12.5 million for the third quarter, reflecting a $2.1 million, or 20.5% increase as compared to the quarter ended October 31, 2004. Shipments on early-season orders were at a higher level in the current year’s third quarter. Continued sales growth in Engineered Films’ pit lining, agricultural, industrial and construction markets generated the majority of the $4.9 million, or 26.5%, revenue increase as compared to the third quarter ended October 31, 2004. For the three-month period, Electronic Systems’ sales of $13.7 million reflected a 2.2% decrease from one-year earlier. Early deliveries of product, which occurred in the second quarter due to customer-driven schedules, affected this segment’s sales in the current quarter. Aerostar quarterly sales of $4.7 million fell short of last year’s third quarter by $1.1 million due primarily to the expected cargo parachute revenue decrease and lower uniform contract sales.

For the nine months ended October 31, 2005, consolidated sales climbed to $150.1 million, a $26.1 million increase from the prior year’s revenue level of $124.1 million. Engineered Films, Electronic Systems, and Flow Controls all posted significant revenue increases for the nine-month period, with the Engineered Films segment recording the largest sales increase of $16.0 million, or 39.2%. Engineered Films recorded sales growth in all of its market segments, with shipments of pit liners for the oil industry continuing to post the largest sales dollar increase. Flow Controls’ sales increased $6.4 million, reaching $37.3 million for the first nine months of the current year. This segment’s revenue level was boosted by the recently acquired automatic boom height control system (“Autoboom ^TM”), which added $2.4 million in sales on a year-to-date basis and higher sales of standard sprayer control systems. Electronic Systems’ sales, which were positively impacted by increased demand from its existing customers, reported a $7.5 million, or 21.5% increase as compared to the nine-month period one-year earlier. Year-to-date Aerostar sales of $13.8 million decreased $3.8 million when compared to the nine-months ended October 31, 2004 due primarily to lower cargo parachute deliveries.

Consolidated gross profit as a percentage of sales decreased slightly from 26.7% for the quarter ended October 31, 2004 to 26.3% for the current quarter and on a year-to-date basis was relatively unchanged, from 26.9% reported last year to 26.8% for the first nine months of the current year. Electronic Systems’ gross profit as a percentage of sales increased from 13.0% to 15.7% for the quarter, and for the nine-month period rose from 10.8% to 17.9%. Improvements in Electronic Systems’ gross profit as a percentage of sales were due to higher sales volume and improved production efficiencies. The Engineered Films gross profit rate decreased 5.1 percentage points for the third quarter as compared to one-year earlier as a result of higher material costs and higher scrap levels as new manufacturing equipment came on-line during the quarter. On a year-to-date basis, Engineered Films’ gross profit as percentage of sales fell from 32.4% last year to 28.3% for the current year.

Consolidated operating income increased $2.5 million to $10.6 million for the quarter ended October 31, 2005 as compared to the quarter ended October 31, 2004. The largest operating income increase for the quarter was posted in the Flow Controls segment, topping last year’s third quarter results by $2.0 million. Included in last year’s third quarter operating income for Flow Controls was a $1.3 million pre-tax write-off of assets related to the Fluent Systems acquisition. Engineered Films reported a third quarter operating income increase of 7.5% due to the segment’s higher sales level, while Electronic Systems posted a 17.9% increase as a result of higher operating efficiencies and increased billings for value-added services. Aerostar operating income fell below last year’s third quarter results by $347,000, or 30.1%. Current quarter administrative expenses declined 10.6% from the quarter ended October 31, 2004 due primarily to a $378,000 favorable insurance settlement received during the quarter partially offset by continued investment in the company’s information technologies and higher corporate giving. Operating income for the first nine months of the year reached $29.0 million, an increase of $6.8 million, or 30.6% over the prior year’s nine-month period. Flow Controls, Engineered Films, and Electronic Systems all achieved increases in operating income. These increases were partially offset by a 41.7% decline in operating income within the Aerostar segment and a 6.8% increase in administrative expenses. Administrative expenses increased on a year-to-date basis due to increased investment in information technologies, higher corporate giving, and spending for professional services related to the Montgomery Industries integration, partially offset by the favorable insurance settlement.

Consolidated other income and interest expense of $67,000 for the quarter ended October 31, 2005 compared favorably to $16,000 reported for the prior year’s third quarter due mainly to increased interest income. For the nine-month period, consolidated other income and interest expense totaled $121,000 for the current year and was $66,000 one-year earlier. As with the quarter, higher interest income due to higher interest rates accounted for the increase.

Income tax expense increased from $2.9 million for the quarter ended October 31, 2004 to $3.8 million for the current quarter and for the nine-month period increased from last year’s $8.0 million to $10.3 million. The increases reported for the quarter and year-to-date reflect higher taxable income as earnings have risen. The company’s year-to-date effective tax rate of 35.4% compares favorably to last year’s nine-month rate of 36.0% due primarily to the impact of the U.S. Federal tax deduction for income attributable to manufacturing activities partially offset by higher state taxes.

The company anticipates sales and earnings growth for the fourth quarter ending January 31, 2006 as compared to last year’s fourth quarter. Flow Controls is expected to report a modest revenue increase when compared to the prior year’s fourth quarter, as the impact of new product introductions may be mitigated by a less-vigorous farm economy. Fourth quarter sales are projected to continue to increase in the company’s Engineered Films segment as compared to the prior year’s fourth quarter due to increases in the segment’s core markets. Disaster film sales may fall below last year’s fourth quarter level of $5 million. Sales, as compared to prior year results, are projected to be higher in the fourth quarter for Electronic Systems as order levels have stabilized. Aerostar sales are expected to be favorable in the upcoming quarter as compared to the prior year’s fourth quarter. Last year’s fourth quarter reflected the beginning of decreased shipments of cargo parachutes from Aerostar and resulted in an operating loss. In the current year, Aerostar has improved its breakeven point and shown consistent profitability.

RESULTS OF OPERATIONS

FLOW CONTROLS

Sales of $12.5 million for the current quarter were $2.1 million, or 20.5% higher than sales for the quarter ended October 31, 2004. Increased sales of the segment’s standard sprayer control systems and revenue generated from boom height-control system (Autoboom ^TM) shipments boosted third quarter results as compared to last year. Third quarter revenue included approximately $400,000 of Autoboom ^TM deliveries. For the nine months ended October 31, 2005, sales were $37.3 million, a $6.4 million, or 20.8% increase in sales from the same period of 2004. As with the quarter, the year-to-date sales increase reflects a higher level of sprayer control system shipments and sales of Autoboom ^TM, which were $2.4 million for the first nine months of the current year. For the nine-month period, deliveries of the segment’s GPS-based automatic steering system also contributed to the sales increase, recording over $500,000 in additional revenue as compared to the prior year.

Operating income of $3.6 million for the current quarter topped results of one-year earlier, increasing $2.0 million. Included in last year’s third quarter operating income for Flow Controls was a $1.3 million pre-tax write-off of assets related to the Fluent Systems acquisition. Excluding the acquisition write-off, Flow Controls’ third quarter operating income increased $678,000, or 23.0%. As a percentage of sales, gross profit margins improved to 37.5% from the 36.6% reported for the prior year’s comparable quarter. The third quarter operating income increase, excluding the Fluent write-off, over one-year earlier reflects the segment’s higher sales level, tempered by an increase in selling expenses. For the third quarter, selling expenses were $1.1 million, a $220,000, or 25.9% increase over last year’s comparable period. Expenses incurred to leverage the segment’s product offerings in Canada contributed to the selling expense increase.

Operating income of $10.9 million for the nine-month period increased $2.4 million, or 27.6%, over operating income of $8.6 million for the nine months ended October 31, 2004. Excluding the previous year’s acquisition write-off, operating income increased 11.0% for the first nine months. The segment’s gross profit as a percentage of sales declined to 36.9% as compared to 39.2% for the prior year’s comparable period. Year-to-date selling expenses reached $2.8 million, an increase of 25.5%, or $574,000. The positive profit impact of the higher sales level for the first nine months has been partially offset by research and development investments and the broadening of the segment’s marketing and distribution plan, which includes the Raven Canada operation.

ENGINEERED FILMS

For the three months ended October 31, 2005, sales increased 26.5%, or $4.9 million from last year’s third quarter, reaching $23.2 million. Sales of pit liners for the oil-drilling industry continued to be strong in the third quarter, as well as industrial and construction market sales. Disaster films sales of $3.2 million in the current quarter reflect a $1.1 million decrease from the prior year’s third quarter. Sales for the current nine-month period climbed to $56.7 million, an increase of $16.0 million, or 39.2% from the same period in 2004. Sales into all of the market segments recorded double-digit growth for the first nine-months, with significant growth achieved in the pit lining, agricultural, and industrial and construction markets. High oil prices continue to boost sales in the pit lining market segment, while a strong construction market has enabled sales growth in the industrial and construction markets. An increase in grain cover shipments accounted for the higher level of agricultural sales for the period. Year-to-date disaster film sales totaled $5.1 million versus $4.3 million reported one-year earlier. Increased product pricing due to higher raw material prices has positively impacted the overall sales level. The increase in sales for the nine months that were a result of higher product pricing has been estimated to be in the 13 to 18% range. Selling price increases vary by product type.

For the quarter, operating income of $5.6 million increased 7.5% as compared to the three months ended October 31, 2004. The profit impact of the segment’s third quarter sales increase was tempered by higher raw material costs and higher material scrap levels. Gross profit as a percent of sales was 27.3% for the current quarter as compared to 32.4% recorded for the three-month period one-year earlier. For the nine months ended October 31, 2005, operating income of $13.9 million exceeded the prior year’s comparable period by $2.5 million, or 22.1%.

The operating income growth due to the segment’s increased sales level was partially offset by the portion of higher raw material costs that were not passed on in the form of higher product pricing and increased selling expenses. Gross profit as a percent of sales for the nine months of 28.3% fell below last year’s nine-month gross profit rate of 32.4%. Year-to-date selling expenses of $2.1 million exceeded the prior year by $379,000, or 21.6% due to higher personnel costs in support of the segment’s higher sales level.

ELECTRONIC SYSTEMS

Segment sales of $13.7 million for the current quarter ended October 31, 2005 were down slightly from the prior year’s third quarter, decreasing $312,000, or 2.2%. Early deliveries of product, which occurred in the second quarter due to customer-driven schedules, negatively affected the overall sales level for the segment in the current quarter. Sales for the nine months ended October 31, 2005 were $42.3 million, up $7.5 million, or 21.5%, over one-year earlier. Year-to-date revenue growth was attributed to increased deliveries to long-term customers. Last year’s nine-month period sales level was negatively impacted by customer delays on orders and operating inefficiencies.

Despite the lower sales level for the quarter, Electronic Systems reported an operating income increase of $292,000 over last year’s third quarter, with operating income reaching $1.9 million versus $1.6 million one-year earlier. The positive variance in operating income is a result of higher gross profits due to increased manufacturing efficiencies on the segment’s longer-term accounts and increased billings for value-added services. Gross profit as a percentage of sales climbed from 13.0% for the quarter ended October 31, 2004 to 15.7% for the current quarter. Operating income of $6.9 million for the first nine months increased $3.8 million over income of $3.1 million for the nine months ended October 31, 2004. The positive impact on operating income due to the higher sales volume achieved for the current year and the segment’s performance improvement on its current contracts contrasts to last year’s start-up inefficiencies. As a percentage of sales, gross profit climbed from 10.8% for the first nine months last year to the current year’s 17.9%.

AEROSTAR

Sales of $4.7 million for the current quarter were $1.1 million less than sales for the quarter ended October 31, 2004 due to lower military cargo parachute deliveries and lower uniform contract sales. For the nine months ended October 31, 2005, revenue of $13.8 million was $3.8 million behind the $17.7 million sales level achieved one year earlier. As with the quarter, sales on a year-to-date basis have been negatively impacted by the decrease in parachute shipments and lower uniform contract sales. Partially offsetting this decrease was an almost $1 million increase in the subsidiary’s high-altitude research balloon sales.

Segment operating income for the current quarter decreased $347,000 to $805,000 when compared to operating income for the quarter ended October 31, 2004. Gross profit as a percentage of sales reflected the impact of the lower sales level, decreasing from 23.9% reported for last year’s third quarter to the current quarter’s 22.1%. Year-to-date operating income was $2.2 million, a decrease of $1.5 million from the first nine months of the prior year. As a percentage of sales, gross profit decreased from 24.7% for the nine months ended October 31, 2004 to 20.6% for the current year. As with the quarter, the impact of decreased cargo parachute revenues and less uniform sales has resulted in lower operating income and a decline in the subsidiary’s gross profit as a percent of sales. The decrease in cargo parachute and uniform profits was partially offset by an improvement in high-altitude research balloon operating income due to higher sales volume.

SOLD BUSINESS

This segment consists of the operations of businesses sold and the company’s ongoing liability for environmental or legal issues of these businesses. Included in the results for the nine months ended October 31, 2005 was an additional $40,000 provision for changes in estimated environmental costs.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities and Cash Position

Operations generated $15.7 million of positive cash flows in the nine months ended October 31, 2005, an increase of $4.9 million from the same period of fiscal 2005 when cash flows from operating activities totaled $10.8 million. Relatively smaller increases in accounts receivable and inventory levels and the company’s continued strong earnings performance accounted for the increase in net cash provided by operating activities between the two periods. For the current year, a lower accounts payable level has negatively impacted operating cash flows. Accounts payable at the company’s January 31, 2005 year-end was relatively high due to rising inventory levels and the extension of payment terms on certain vendor invoices.

Total cash, cash equivalents, and short-term investments were $12.2 million as of
October 31, 2005, an increase of $2.6 million as compared to the company’s January 31, 2005 cash position of $9.6 million and were $3.3 million higher than the October 31, 2004 cash position of $8.9 million. The positive cash flows from operating activities has more than offset cash used to fund the $2.8 million Montgomery Industries acquisition and the capital investment being made in the current year for additional Engineered Films production capacity.

The company expects that current cash and short-term investments, combined with continued positive operating cash flows and the company’s short-term line of credit, will be sufficient to fund day-to-day operations.

Investing and Financing Activities

Cash used in investing activities totaled $7.7 million, increasing $3.7 million for the nine months ended October 31, 2005 as compared to cash used of $4.0 million for the nine months ended October 31, 2004. The increase was a result of higher capital expenditures, particularly in the company’s Engineered Films segment for additional manufacturing capacity and facilities and $2.8 million for the acquisition of Montgomery Industries.

Financing activities used $4.9 million in cash for the nine months ended October 31, 2005 as compared to $16.3 million used in last year’s comparable period. The payment of dividends and repurchases of stock continue to be the principal financing activities of the company. Dividend payments totaled $3.8 million for the nine-month period of the current year and treasury stock purchases totaled $1.0 million as compared to $14.3 million of dividends paid in the first nine months of last year, which included a special one-time dividend payment of $11.3 million, and $2.0 million of treasury stock purchases. Seasonal short-term borrowings on the company’s line of credit facility totaled $4.5 million for the current year. These borrowings were repaid by April 30, 2005.

Commitments and Contingencies

There have been no material changes to the company’s commitments and contingencies since the obligations disclosed in its Form 10-K for the fiscal year ended January 31, 2005.

Recent Accounting Developments

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’s debt consists of capital leases, all of which have fixed interest rates. 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.

A portion of the company’s revenue is derived from the sale of products in Canada. The Canadian dollar is considered the functional currency of the company’s Canadian operation. The results of operations and financial position of the Canadian subsidiary are measured in Canadian dollars and translated into U.S. dollars, using the period-end exchange rate for the balance sheet translation and an average rate for the statement of earnings. During the quarter and nine months ended October 31, 2005, there were no significant foreign currency fluctuations that materially impacted the consolidated results of operations or financial condition.

ITEM 4. INTERNAL CONTROLS AND PROCEDURES

Under the supervision and with the participation of the company’s management, including the Chief Executive Officer and Chief Financial Officer, the company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as such term is defined under Exchange Act Rule 13a-15(e) and 15(d)-15(e) as of October 31, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There were no changes in the company’s internal control over financial reporting that occurred during the quarter ended October 31, 2005 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act provides a “safe harbor” for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by the company with the Securities and Exchange Commission (as well as information included in statements made or to be made by the company) contains statements that are forward-looking. Although the company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there is no assurance that such expectations will be achieved. Such assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions, which could affect certain of the company’s primary markets, such as agriculture and construction, or changes in competition, raw material availability, technology or relationships with the company’s largest customers, any of which could adversely impact any of the company’s product lines. The foregoing list is not exhaustive and the company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.

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 2. Changes in Securities:

Repurchases of the company’s common stock during the third quarter of fiscal 2006 were as follows:


							Max #(or approx
					Total # shares		$ value) of shares
					Purchased as part		that may yet be
					of Publicly		purchased under
Period	Total number		Average price		Announced Plan		the Plans
August 2005		11,300	$	23.30		11,300	$	825,920
September 2005		—	$	—		—	$	825,920
October 2005		3,000	$	28.29		3,000	$	741,042

Total Third Quarter		14,300	$	24.35		14,300

Under resolutions from the Board of Directors dated August 25, 2005 and November 18, 2005, the company has authority to repurchase up to $1.0 million of stock on the open market, respectively. The Board of Directors has renewed these authorizations quarterly; there is no assurance the Board will continue this practice.

Item 3. Defaults upon Senior Securities: None

Item 4. Submission of Matters to a Vote of Security Holders: None

Item 5. Other Information: None

Item 6. Exhibits Filed:

	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 Pursuant to Section 906 of Sarbanes-Oxley Act

	32.2		Certification Pursuant to Section 906 of Sarbanes-Oxley Act


	Page
Part I — Financial Information

Item 1. — Consolidated Financial Statements

Consolidated Balance Sheets (Unaudited) As of October 31, 2005, January 31, 2005, and October 31, 2004		3

Consolidated Statements of Income (Unaudited) For the three and nine month periods ended October 31, 2005 and 2004		4

Consolidated Statements of Cash Flows (Unaudited) For the nine month periods ended October 31, 2005 and 2004		5

Notes to Consolidated Financial Statements		6-9

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations		10-15

Item 3. — Quantitative and Qualitative Disclosures about Market Risks		15

Item 4. — Internal Controls and Procedures		16

Part II — Other Information		17

Item 1. — Legal Proceedings

Item 2. — Changes in Securities

Item 3. — Defaults upon Senior Securities

Item 4. — Submission of Matters to a Vote of Security Holders

Item 5. — Other Information

Item 6. — Exhibits

Signatures
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906


		RAVEN INDUSTRIES, INC.

		/s/ Thomas Iacarella
		Thomas Iacarella
		Vice President and CFO, Secretary and Treasurer
		(Principal Financial and Accounting Officer)

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