FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- --------- Commission file number 2-81315 FLOW INTERNATIONAL CORPORATION DELAWARE 91-1104842 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 23500 - 64TH AVENUE SOUTH KENT, WASHINGTON 98032 (206) 850-3500 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. Yes X No . ----- ----- The number of shares outstanding of common stock, as of August 30, 1996: 14,586,969 shares. FLOW INTERNATIONAL CORPORATION INDEX Page ---- Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets - July 31, 1996 and April 30, 1996............................... 3 Condensed Consolidated Statements of Income - Three Months Ended July 31, 1996 and 1995...................... 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended July 31, 1996 and 1995...................... 5 Notes to Condensed Consolidated Financial Statements............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 7 Part II - OTHER INFORMATION Item 1. Legal Proceedings............................................ 9 Item 2. Changes in Securities........................................ 9 Item 3. Defaults Upon Senior Securities.............................. 9 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 9 Item 5. Other Information............................................ 9 Item 6. Exhibits and Reports on Form 8-K............................. 9 Signatures................................................................10 -2- FLOW INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) July 31, April 30, 1996 1996 --------- --------- (unaudited) ASSETS ------ Current Assets: Cash $ 3,273 $ 3,845 Trade Accounts Receivable, less allowances for doubtful accounts of $1,373 and $1,186, respectively 36,464 35,467 Inventories 36,261 34,589 Deferred Income Taxes 1,965 1,965 Other Current Assets 4,574 4,978 --------- --------- Total Current Assets 82,537 80,844 Property and Equipment, net 27,533 27,083 Intangible Assets, net of accumulated amortization of $3,651 and $3,294, respectively 13,544 13,901 Deferred Income Taxes 712 699 Other Assets 4,196 3,966 --------- --------- $ 128,522 $ 126,493 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Notes Payable $ 2,130 $ 2,304 Current Portion of Long-Term Obligations 926 1,035 Accounts Payable 12,334 12,088 Accrued Payroll and Related Liabilities 4,446 3,942 Other Accrued Taxes 858 590 Other Accrued Liabilities 3,778 3,019 --------- --------- Total Current Liabilities 24,472 22,978 Long-Term Obligations 44,050 45,590 Minority Interest 755 865 Shareholders' Equity: Series A 8% Convertible Preferred Stock - $.01 par value, $500 liquidation preference, 1,000,000 shares authorized, 0 issued Common Stock - $.01 par value, 20,000,000 shares authorized 14,857,297 and 14,580,894 shares issued and outstanding, respectively, at July 31, 1996 14,784,647 and 14,508,244 shares issued and outstanding, respectively, at April 30, 1996 149 148 Capital in Excess of Par 38,299 38,038 Retained Earnings 20,773 18,541 Treasury Common Stock of 276,403 shares at cost (556) (556) Cumulative Translation Adjustment 649 981 Loan to Employee Stock Ownership Plan & Trust (69) (92) --------- --------- Total Stockholders' Equity 59,245 57,060 --------- --------- $ 128,522 $ 126,493 --------- --------- --------- --------- See Accompanying Notes to Condensed Consolidated Financial Statements -3- FLOW INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited) Three Months Ended July 31, ----------------------- 1996 1995 Revenue: Sales $32,353 $24,900 Services 5,236 5,341 Rentals 3,340 2,772 -------- -------- Total Revenues 40,929 33,013 Cost of Sales: Sales 19,244 14,063 Services 3,808 3,788 Rentals 1,604 1,257 -------- -------- Total Cost of Sales 24,656 19,108 -------- -------- Gross Profit 16,273 13,905 Expenses: Marketing 6,232 5,254 Research and Engineering 2,167 1,824 General and Administrative 4,102 3,668 -------- -------- 12,501 10,746 -------- -------- Operating Income 3,772 3,159 Interest and Other Expense, net (629) (501) -------- -------- Income Before Provision for Income Taxes 3,143 2,658 Provision for Income Taxes 911 598 -------- -------- Net Income $ 2,232 $ 2,060 -------- -------- -------- -------- Earnings Per Common and Equivalent Shares $ .15 $ .14 -------- -------- -------- -------- See Accompanying Notes to Condensed Consolidated Financial Statements -4- FLOW INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended July 31, ------------------- 1996 1995 Cash Flows from Operating Activities: Net Income $ 2,232 $ 2,060 Adjustments to Reconcile Net Income to Cash Provided (Used) by Operating Activities: Depreciation and Amortization 1,949 1,721 Other 23 23 Increase in assets (2,508) (3,213) Increase (decrease) in liabilities 1,667 (1,562) -------- -------- Cash provided (used) by operating activities 3,363 (971) -------- -------- Cash Flows from Investing Activities: Expenditures for property and equipment (2,023) (2,002) Payment for business combination, net of cash acquired (186) Other (19) 129 -------- -------- Cash used by investing activities (2,042) (2,059) -------- -------- Cash Flows from Financing Activities: Borrowings (repayments) under line of credit agreements, net (1,785) 4,992 Payments of long-term debt (38) (1,004) Proceeds from issuance of common stock 262 70 -------- -------- Cash provided (used) by financing activities (1,561) 4,058 -------- -------- Effect of exchange rate changes on cash (332) (193) -------- -------- Increase (decrease) in cash and cash equivalents (572) 835 Cash and cash equivalents at beginning of period 3,845 1,074 -------- -------- Cash and cash equivalents at end of period $ 3,273 $ 1,909 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Fair value of assets acquired $ 2,860 Cash paid for assets acquired (597) -------- Liabilities assumed $ 2,263 -------- -------- See Accompanying Notes to Condensed Consolidated Financial Statements -5- FLOW INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended July 31, 1996 (unaudited) 1. In the opinion of the management of Flow International Corporation (the "Company"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position, statements of income, and cash flows for the interim periods presented. These interim financial statements should be read in conjunction with the April 30, 1996 consolidated financial statements. 2. Primary earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding plus the equivalent shares attributable to dilutive stock options during each period. The weighted average number of shares outstanding, including equivalent shares where required, for the three months ended July 31, 1996 and 1995 were 15,025,000 and 15,002,000, respectively. Fully diluted earnings per share do not differ materially from primary earnings per share. 3. Inventories consist of the following: (in thousands) July 31, 1996 April 30, 1996 ------------- -------------- Raw Materials and Parts $21,321 $20,982 Work in Process 7,548 6,339 Finished Goods 7,392 7,268 ------- ------- $36,261 $34,589 ------- ------- ------- ------- -6- FLOW INTERNATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1996 AND 1995 Total revenues for the three months ended July 31, 1996 were $40.9 million, representing an increase of $7.9 million (24%) over the comparable period in the prior year. The increase in sales revenues of $7.5 million (30%) to $32.4 million came primarily from growth in the ultra-high pressure ("UHP") business. Waterjet system sales increased 49% over the prior year. Spare parts also recorded double digit growth and the increase in system sales lays the foundation for further growth of the spares business. Strength in the UHP market was demonstrated in North America where sales increased 50% and in Europe which posted a 29% growth over the prior year. Access related revenues grew 13% as compared to the prior year. Service revenues decreased slightly over the prior year while rental revenues increased 20%. Gross profit as a percentage of revenues (gross margin rate) was 40% for the quarter as compared to 42% in the prior year. Comparison of gross margin rates is dependent on the mix of revenue types, which includes sales, services, and rentals; and the mix of spare parts and systems in sales revenues. Robotic systems typically carry lower gross margin rates than the Company's pump, spare parts, and access systems businesses. The decrease in gross margin rate for the quarter was primarily due to a shift in mix towards total system sales. Operating expenses of $12.5 million for the quarter ended July 31, 1996 were 31% of revenues as compared to 33% in the prior year. This decrease is reflective of the efforts of management to control costs and will remain a focus of management as the Company grows. Interest and other expense, net, of $629,000 represents an increase of $128,000 (26%) over the prior year. This difference relates primarily to foreign exchange gains recorded in the previous year. The income tax rate was lower than the statutory rate in both the current and prior year due primarily to lower foreign tax rates, benefits from the foreign sales corporation, and an ongoing review of the Company's FAS 109 valuation allowance. Based upon the expected tax position of the Company for fiscal 1997, taxes have been provided for at 29% versus 22% in the prior year. As a result of the above, the Company recorded net income of $2.2 million, or 15 cents per share for the three months ended July 31, 1996, compared to $2.1 million, or 14 cents per share for the same period last year. -7- FLOW INTERNATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company generated $3.4 million in cash from operations during the three months ended July 31, 1996. For the like period in the prior year, the Company used $1 million in its operating activities. Total debt at July 31, 1996 was $47.1 million, down $1.8 million from April 30, 1996. The Company believes that the available credit facilities and working capital generated by operations, will provide sufficient resources to meet its operating and capital requirements. The Company's Credit Agreement and Private Placement require the Company to comply with certain financial covenants. As of July 31, 1996, the Company was in compliance with all such covenants. Gross trade receivables at July 31, 1996 increased $1.2 million (3%), from April 30, 1995. This is a function of an increase in sales as well as a change in the mix towards large system sales. Longer payment terms are sometimes negotiated on large system orders. Days sales in gross accounts receivable can be negatively impacted by the traditionally longer payment cycle outside the United States. The Company's management does not believe these timing issues will present a material adverse impact on the Company's short-term liquidity requirements. Inventories at July 31, 1996 increased $1.7 million (5%), from April 30, 1996. This increase is primarily in work in process and represents products manufactured by ASI and Dynovation which can require an extended manufacturing period. SAFE HARBOR STATEMENT: STATEMENTS IN THIS REPORT THAT ARE NOT STRICTLY HISTORICAL ARE "FORWARD-LOOKING" STATEMENTS WHICH SHOULD BE CONSIDERED AS SUBJECT TO THE MANY UNCERTAINTIES THAT EXIST IN THE COMPANY'S OPERATIONS AND BUSINESS ENVIRONMENT. THESE UNCERTAINTIES, WHICH INCLUDE ECONOMIC AND CURRENCY CONDITIONS, MARKET DEMAND AND PRICING, COMPETITIVE AND COST FACTORS, AND THE LIKE, ARE SET FORTH IN THE FLOW INTERNATIONAL CORPORATION FORM 10-K REPORT FOR 1996 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. -8- FLOW INTERNATIONAL CORPORATION PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is party to various legal actions incident to the normal operations of its business, none of which is believed to be material to the financial condition of the Company. Item 2. CHANGES IN SECURITIES None 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 AND REPORTS ON FORM 8-K (a) Exhibits - None (b) Reports on Form 8-K - None -9- FLOW INTERNATIONAL CORPORATION 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. FLOW INTERNATIONAL CORPORATION Date: September 5, 1996 /s/ Ronald W. Tarrant ---------------------------------- Ronald W. Tarrant Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: September 5, 1996 /s/ Stephen D. Reichenbach ---------------------------------- Stephen D. Reichenbach Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -10-