SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997
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 0-12448
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value
Preferred Stock Purchase Rights
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 .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non affiliates of the
registrant based upon the closing price reported by the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") as of June 5, 1997,
was $129,359,000. The number of shares of common stock outstanding as of June
5, 1997, was 14,676,104 shares.
DOCUMENTS INCORPORATED BY REFERENCE
PART I: None
PART II: None
PART III: All Items -- See Registrant's definitive proxy statement which
involves the election of directors and which will be filed with
the Commission within 120 days after the close of the fiscal year.
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial
Owners and Management
Item 13 Certain Relationships and Related Transactions
PART I
ITEM 1. BUSINESS
Flow International Corporation ("Flow" or the "Company") designs, develops,
manufactures, markets, and services ultrahigh-pressure ("UHP") waterjet cutting
and cleaning systems, and specialized robotics and factory automation systems;
and is a leading provider of access equipment. Flow provides technologically-
advanced, environmentally-sound solutions to the manufacturing, industrial
cleaning and construction services markets. The Company's waterjet systems
pressurize water from 30,000 to 100,000 pounds per square inch (psi) and are
used to cut both metallic and nonmetallic materials in many industry segments,
including the aerospace, automotive, disposable products, food, glass, job shop,
sign, metal cutting, marble and other stone cutting, oil field services and
paper industries. The Company also manufactures the robotic articulation
equipment used in the cutting and cleaning processes, as well as other factory
automation systems, such as assembly, pick and place and load/unload operations.
The Company's infrastructure products include UHP waterjets for use in
industrial cleaning, surface preparation, construction, nuclear decontamination,
and petro-chemical applications, as well as access systems for use in these
applications. The Company also provides, as a service, the removal of
deteriorated concrete from bridges and parking garages using UHP waterjets
("HydroMilling-Registered Trademark-"), and the removal of rubber, paint and
grout from commercial and military runways ("HydroCleaning-TM-"). The Company
has recently begun to apply UHP technology on pumpable fresh foods, such as
juices, coffee extracts and salad dressings. Unlike thermal treatment,
ultrahigh-pressure exposure of pumpable fresh foods can destroy micro-organisms
that can cause spoilage while maintaining all of the product's fresh taste and
health qualities. As of April 30, 1997, the Company was working with several
different companies in the fresh food industry; however, no revenues had been
generated as of the end of fiscal 1997.
The Company was formed in 1974, incorporated in 1980, and completed its
initial public offering in March 1983. In 1991, the Company's founder retired,
and Ronald W. Tarrant was appointed President and Chief Executive Officer.
Since 1991, the Company has grown as a result of continued new product
development, expanded marketing strategies, and certain strategic acquisitions.
In September 1992, the Company acquired all of the outstanding stock of
Spider Staging Corporation ("Spider"). Spider designs, manufactures, rents,
sells, and services access systems to a variety of industrial and construction
related markets.
In April 1993, the Company acquired substantially all of the assets of
Power Climber, Inc. ("Power Climber"), and affiliated companies. Prior to the
acquisition, Power Climber was a supplier to Spider, and designs and markets
access systems in the U.S., Europe and Asia using traction hoist technology.
On November 4, 1994, the Company entered into a licensing agreement with
Ark Systems, Inc. ("Ark"). Ark designs and manufactures a range of access
containment systems which are used in under-bridge and other applications for
surface preparation, lead-paint abatement, cleaning and maintenance. The
agreement gives Spider the exclusive worldwide marketing and manufacturing
rights for the Ark product line for five years.
On December 15, 1994, the Company purchased certain net assets of
Dynovation Machine Systems, Inc. ("Flow Automation"). Flow Automation designs
and manufactures robotic waterjet cutting cells and automated assembly systems
for the automotive and other industries, as well as a line of proprietary
vibratory feeder bowls for these industries.
On January 3, 1995, the Company purchased certain net assets of ASI
Robotics Systems ("Flow Robotics"). Flow Robotics designs and manufactures
high accuracy gantry-type robots and related systems used in waterjet and
factory automation applications. Flow Robotics supplies its products to the
aerospace, automotive, job shop, marble and tile and other industries.
In April 1995, the Company became a majority partner in a joint venture
with Consortium Europeen du Materiel ("CEM"). CEM has offices in Paris, Lyon,
and Marseilles for the sale and rental of access products in France.
In May 1995, the Company invested in a majority interest in a joint venture
with Okura & Co., Ltd., its exclusive Japanese distributor. This joint venture
supplies UHP products in Japan and to Japanese companies in Asia.
In February 1997, the Company announced its intention to re-focus on its
core ultrahigh-pressure technology and divest itself of its Access and Services
business. The Access business is comprised of the Spider, Power Climber, Ark
and CEM businesses. The Services business represents the HydroMilling and
HydroCleaning operations. The Company has retained an investment banker to
assist in reviewing the strategic alternatives and executing the selected
strategy. During fiscal 1997 the company recorded a $9 million restructuring
charge related to the proposed divestiture of the Access and Services
businesses.
PRODUCTS AND SERVICES
The Company provides UHP waterjets and related products and services to a
wide variety of industries. The Company divides its revenues into four primary
categories of product:
(In thousands) 1997 1996 1995
Revenue % Revenue % Revenue %
------------------------------------------------------------------------------------
UHP Waterjet and Factory
Automation Systems $71,658 43 $56,495 39 $36,600 33
UHP Spare Parts and Services 40,774 24 36,076 25 28,529 26
Access Systems and Services 40,978 24 38,857 27 33,566 31
HydroMilling-Registered Trademark- and
HydroCleaning-TM- Services 14,783 9 13,477 9 11,315 10
------------------------------------------------------------------------------------
Total Revenues $168,193 100 $144,905 100 $110,010 100
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
UHP WATERJET AND FACTORY AUTOMATION SYSTEMS, SPARE PARTS AND SERVICES
The Company offers a variety of UHP waterjet equipment and factory
automation system products and accessories, including robotic articulation
equipment. UHP intensifier and direct-drive pumps are currently the core
components of the Company's products. An intensifier pump pressurizes water up
to 100,000 psi and forces it through a small nozzle, generating a high-velocity
stream of water. The Company's unique direct-drive pressure-compensated pumps
pressurize water to in excess of 50,000 psi utilizing triplex piston technology.
In order to cut metallic and other hard materials, abrasive is added to the
waterjet stream creating an abrasivejet. The Company's abrasivejet cuts with no
heat, causes no metallurgical changes, and leaves a high-quality edge that
usually requires no additional finishing.
A UHP waterjet system consists of an ultrahigh-pressure intensifier or
direct drive pump, one or more waterjet cutting and cleaning heads with
necessary robotics, motion control and automation systems. The Company has
placed UHP waterjet cutting systems worldwide and in many different industries,
including the aerospace, automotive, disposable products, food, glass, job shop,
sign, metal cutting, marble and other stone cutting, oil field services and
paper industries. The Company's UHP waterjet systems are also used in
industrial cleaning applications such as paint removal, surface preparation,
factory and industrial cleaning, ship hull preparation, and heat exchanger
cleaning. The Company's factory automation equipment is used in applications
such as pick and place operations, inspection, assembly, and other automated
processes. Sales of UHP waterjet and factory automation systems accounted for
43% of fiscal 1997 revenues.
Flow produces a range of tools and accessories which incorporate waterjet
technology, and sells aftermarket spare parts and services for its products.
Sales of UHP spare parts and services accounted for
24% of fiscal 1997 revenues. Spare parts sales help to insulate the Company
from the adverse effects of economic swings, when industrial customers tend to
reduce investment in new capital equipment.
ACCESS SYSTEMS AND SERVICES
The Company designs, manufactures, rents, sells, and services access
systems for use in industrial, structural and facade maintenance and
construction applications. The Company's permanent, mobile or temporary work
platforms provide access to exterior building surfaces and construction sites,
bridges, ships, offshore oil rigs, radio towers, sports stadiums, and
hydroelectric dams; and internal access to large water and chemical tanks, power
plant boilers, missile silos, and other industrial applications. The Company's
permanently installed systems provide access to exterior surfaces of high-rise
buildings for exterior maintenance, window washing, painting and building
restoration. The Company is the North American distributor of the Nihon Bisoh
automatic exterior maintenance systems and the exclusive U.S. distributor of a
line of permanently installed access systems produced by Mannesmann of Germany.
In fiscal 1997, sales, rental and service of access systems amounted to 24% of
total revenues. The Company has announced it's intention of selling this entire
product line.
HYDROMILLING AND HYDROCLEANING SERVICES
The Company provides HydroMilling services on a contract and subcontract
basis for the removal of deteriorated concrete from bridges and parking garage
surfaces. The Company's proprietary HydroMilling systems operate in the pressure
range of 25,000 to 36,000 psi, and use a proprietary rotating ultrahigh-pressure
waterjet, mounted on a robot, to remove concrete. The depth of removal can be
controlled by adjusting the pressure and traverse speed of the waterjet nozzle.
Flow's Rampart unit provides HydroCleaning services to commercial and military
airfields. Ultrahigh-pressure waterjets are used for the removal of rubber,
paint and grout from airport runways. In fiscal 1997, HydroMilling and
HydroCleaning revenues were 9% of total revenues. In February 1997, the Company
announced plans to sell the Services business as part of its efforts to refocus
on its core UHP sales strategy.
MARKETING AND SALES
The Company markets and sells its products worldwide through its
headquarters in Kent, Washington (a suburb of Seattle) and through subsidiaries,
divisions and joint ventures in Pittsburgh, Pennsylvania; Johnstown,
Pennsylvania; Jeffersonville, Indiana; Burlington, Canada; Darmstadt, Germany;
Antwerp, Belgium; Paris, France; Lyon, France; Marseilles, France; Tokyo, Japan;
Nagoya, Japan; and Hsinchu, Taiwan; and through branch offices in seventeen
North American cities. The Company sells directly to customers in North
America, Europe, and Asia, and has distributors or agents in most other
countries. In the U.S., the Company uses a select group of machine tool
distributors for sales, distribution and services of its Bengal product line.
No customer accounted for 10% or more of the Company's revenues during any
of the three years ended April 30, 1997.
Marketing efforts are focused on various target industries, applications,
and markets. To enhance the effectiveness of sales efforts, the marketing staff
and sales force acquire detailed information on the manufacturing applications
and construction processes in targeted markets. This information is used to
develop standardized and customized solutions using both UHP waterjet and
robotics technologies, and access systems. In selling both standard and custom-
designed waterjet and access systems, the Company provides turnkey systems,
including system design, specification, hardware and software integration,
equipment testing and simulation, installation, start-up services, technical
training and service.
One of the Company's marketing techniques utilizes a telemarketing program
to identify and qualify sales leads, thus increasing the efficiency of the
direct sales staff. Market responses to these activities are carefully screened
to identify new areas of interest and new potential applications. The Company
also attends trade shows for targeted market segments and advertises in selected
industry publications.
The Company markets its proprietary HydroMilling and HydroCleaning services
primarily in the United States. HydroMilling services are provided primarily in
the Northeast and Midwest areas of the country where concrete deteriorates
faster due to the freeze-thaw cycle and use of salt on roadways. HydroCleaning
services are provided throughout the United States. Services are marketed
directly to customers by the Company's sales force.
Application of the Company's products and services in the construction
industry vary with construction cycles. Sales in the March through October
period tend to be higher than sales in the remaining months of the year.
PATENTS AND LICENSES
The Company holds a large number of patents relating to UHP waterjet
technology and systems, and to access system products and applications. Some of
these patents are subject to sub-licenses. In addition, the Company has been
granted licenses with respect to other patents used in the business.
While the Company believes the patents it uses are valid, it does not
consider its business dependent on patent protection. In addition, the Company
has over the years developed non-patented proprietary expertise and know-how in
waterjet and access system applications, and in the manufacture of these
systems, which sets it technologically ahead.
The Company believes the patents it holds and has in process, along with
the proprietary application and manufacturing know-how, act as a barrier of
entry into the markets it serves.
BACKLOG
At April 30, 1997, the Company's backlog was $31.6 million, up 26% from
$25.1 million at the prior year end. Backlog associated with the UHP and
automation business was $18.3 million at April 30, 1997. Based upon the terms
of the customer contracts and the Company's manufacturing schedule, all of the
revenue backlog as of April 30, 1997 is expected to be realized during fiscal
1998. Amounts expected to be billed after April 30, 1998 have been excluded
from this backlog presentation. The unit sales price for most of the Company's
products and services is relatively high (typically ranging from tens of
thousands to millions of dollars) and individual orders can involve the delivery
of several hundred thousand dollars of products or services at one time.
Furthermore, some items in backlog can be shipped more quickly than others, and
some have higher profit margins than others. Consequently, even sizable
variations in the amount of the Company's backlog between particular dates are
not necessarily indicative of comparable variations in sales or earnings.
COMPETITION
The major competitors for UHP waterjet systems are conventional cutting and
cleaning methods. These methods are saws, knives, shears, torches, lasers,
abrasive wheels, grinders, routers, drills, dies, and abrasive cleaning
techniques. A UHP waterjet cutting system has many advantages over conventional
cutting systems, including no generation of heat or airborne dust, easy
adaptability to complex cutting programs, and the ability to leave clean-cut
edges. These factors, in addition to elimination of secondary processing in
most circumstances, enhance manufacturing productivity. Waterjet cleaning
offers many advantages over other cleaning methods, such as the ability to
remove difficult coatings or deposits from a surface without damaging underlying
material. A UHP waterjet system is an environmentally-friendly answer to many
difficult cutting and cleaning applications and can often be justified solely on
the basis of the removal of hazardous materials or reduction of secondary
operations from the production process.
The Company also competes with other waterjet cutting equipment
manufacturers in the United States, Europe and Asia. Certain of these
competitors have greater financial resources than the Company. The Company's
robotics acquisitions give Flow a competitive advantage as the only total
solution supplier of a complete waterjet cutting system. Although independent
market information is not generally available, based upon data assembled from
internal and external sources, Company management believes it is the largest
manufacturer of UHP waterjet cutting systems in the world.
With respect to access systems, the Company believes that service, price,
product performance, and reliability are the key competitive factors.
Management believes that its products are priced competitively and that the
strength of its North American branch system and its product reliability are key
to its results. In the permanently installed access system markets, the Company
believes there are 15 to 20 firms with which it competes. None of these firms
dominate the market.
The primary competitors to HydroMilling services are traditional concrete
removal operators. The advantages of the UHP approach of HydroMilling over
other concrete removal systems, such as jackhammers, include increased speed,
reduced cost and noise, better depth control and concrete bonding;
and the elimination of micro-cracks, rebar damage, vibration, and dust.
HydroMilling also competes with other hydrodemolition contractors, most of which
use waterjets at 10,000 to 25,000 psi with significantly higher volumes of water
and lower productivity. The Company believes that its process, operating with
pressures to 36,000 psi, produces a higher quality bonding surface and that the
size of its fleet as compared to competitors enables it to complete larger
projects more quickly.
HydroCleaning competitors include companies using chemical processes and
other mechanical means. The Company believes that the speed and
environmentally-friendly aspects of its process are key advantages.
Overall, the Company believes that its competitive position is enhanced by
(1) technically advanced, proprietary products that provide excellent
reliability, low operating costs, and user-friendly features, (2) a strong
application-oriented, problem-solving marketing and sales approach, (3) an
active research and development program that allows it to maintain technical
leadership, (4) the ability to provide complete turnkey systems, (5) a strong
position in key markets, such as the U.S., Canada, Japan, southeast Asia and
Europe, (6) strong OEM customer ties, and (7) efficient production facilities.
RESEARCH AND ENGINEERING
The Company has allocated between 5% and 6% of revenues to research and
engineering during each of the three years ended April 30, 1997. Research and
engineering expenses were approximately $8,749,000, $8,110,000, and $6,784,000
in fiscal years 1997, 1996, and 1995, respectively.
EMPLOYEES
As of April 30, 1997, the Company employed 970 full time and 20 part time
personnel. Approximately 775 of these employees were associated with the UHP
and Automation business. There are no material collective bargaining agreements
to which the Company is a party.
FOREIGN AND DOMESTIC OPERATIONS
See Note 14 of Notes to Consolidated Financial Statements for information
regarding foreign and domestic operations.
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.
Significant factors which may affect future Company performance include the
following:
The Company's growth depends, in part, on the successful development of
improvements to its equipment and on the introduction of new products and
technologies. Improvements in competing technologies could affect the Company's
ability to market its products.
The Company's financial performance could fall short of its goals if a
change in overall economic conditions results in a decrease in the purchase of
capital goods by its customers. Changes in the mix of products sold by the
Company can also affect the gross margin achieved. Also, unfavorable or
inclement weather could affect the results of the Company's Access and Flow
Services divisions, which are somewhat seasonal in nature.
The Company's performance may also be affected by factors related to the
proposed divestiture of its Access and Services businesses. These factors
include the risks that a transaction may not be completed, that the costs
associated with completing a transaction may be higher than anticipated, that a
suitable purchaser might not be available or that the amounts realized may be
less than anticipated.
ITEM 2. PROPERTIES
The Company's headquarters and primary manufacturing facilities are located
in one leased facility in Kent, Washington. In addition, the Company maintains
HydroMilling office and shop facilities in Pittsburgh, Pennsylvania;
manufacturing facilities in Jeffersonville, Indiana; sales facilities in
seventeen North American cities; Tokyo and Nagoya, Japan and three cities in
France; and sales, manufacturing and warehouse facilities in Johnstown,
Pennsylvania; Burlington, Canada; Hsinchu, Taiwan; Antwerp, Belgium; and
Darmstadt, Germany.
All facilities of the Company are leased with the exception of a warehouse
and sales facility in Chicago, Illinois and a manufacturing facility in
Jeffersonville, Indiana.
The Company believes that its facilities are suitable for its current
operations and that expansion in the near term will not require additional
space. The Company further considers that its primary manufacturing facility
will be adequate to meet production requirements for the next three to five
years.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various legal actions incident to the normal
operation of its business, none of which is believed to be material to the
financial condition of the Company. See Notes 1 and 13 of Notes to Consolidated
Financial Statements for a description of the Company's product liability
insurance coverage and estimated exposure.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
See page 13
ITEM 6. SELECTED FINANCIAL DATA.
See page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See pages 14 through 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages 21 through 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The principal market for the Company's common stock is the over-the-counter
market. The Company's stock is traded on the NASDAQ National Market under the
symbol "FLOW." The range of high and low sales prices for the Company's common
stock for the last two fiscal years is set forth in the table below.
Fiscal Year 1997 Fiscal Year 1996
High Low High Low
---------------------------------------
First Quarter $10.13 $6.50 $10.50 $8.13
Second Quarter 9.38 7.38 13.25 9.38
Third Quarter 10.00 7.38 12.13 7.88
Fourth Quarter 10.13 8.38 10.88 7.88
There were 1,455 stockholders of record as of June 5, 1997.
The Company has not paid dividends to common stockholders in the past.
The Board of Directors intends to retain future earnings to finance development
and expansion of the Company's business and does not expect to declare dividends
to common stockholders in the near future.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended April 30,
(In thousands, except per share data) ------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------
Income Statement Data:
Revenue $168,193 $144,905 $110,010 $88,632 $79,079
Pretax Income 963 8,902 9,259 3,112 5,791
Net Income 725 7,085 7,728 2,953 4,641
Earnings Per Share 0.05 0.47 0.53 0.21 0.33
Balance Sheet Data:
Working Capital 68,126 57,866 44,592 25,415 25,060
Total Assets 133,466 126,493 105,484 78,228 69,276
Short-Term Debt 1,730 3,339 2,412 16,504 10,403
Long-Term Obligations 53,569 45,590 33,359 10,559 12,549
Stockholders' Equity 56,753 57,060 49,803 37,948 34,225
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company provides ultrahigh-pressure ("UHP") waterjet, factory
automation and access systems, and related products and services to a wide
variety of industries. The following table sets forth the Company's
consolidated revenues by major product categories.
CONSOLIDATED REVENUES BY MAJOR PRODUCT CATEGORIES
(In thousands) 1997 1996 1995
Revenue % Revenue % Revenue %
------------------------------------------------------------------------------------
UHP Waterjet and Factory
Automation Systems $ 71,658 43 $ 56,495 39 $ 36,600 33
UHP Spare Parts and Services 40,774 24 36,076 25 28,529 26
Access Systems and Services 40,978 24 38,857 27 33,566 31
HydroMilling-Registered Trademark- and
HydroCleaning-TM- Services 14,783 9 13,477 9 11,315 10
-----------------------------------------------------------------------------------
Total Revenues $168,193 100 $144,905 100 $110,010 100
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues for the year ended April 30, 1997 were $168.2 million, an
increase of $23.3 million (16%) over the prior year period. Sales from the
Company's UHP and Automation business increased $19.9 million (21%) to $112.4
million. Within UHP and Automation, systems sales increased $15.2 million (27%)
while spare parts and services revenues increased $4.7 million (13%). Sales of
the Company's standard systems: the Flying Bridge, the Bengal and the A-series,
represent the primary increase in systems sales. The spare parts increase
reflects the increased base of UHP waterjet systems installed throughout the
world. Spare parts and services are a continuing and significant part of the
Company's business, and generally have a higher profit margin than systems.
Spare parts are composed primarily of consumables used in the cutting, surface
preparation and cleaning processes. UHP and Automation revenues grew in all
three primary geographic markets, North America, Asia and Europe, with increases
of 27%, 16% and 11%, respectively, over the prior year. The Company typically
sells its products at higher prices outside the United States due to the costs
of servicing these markets. Access revenues increased $2.1 million (5%) versus
the prior year. Within Access, rental revenues rose $2.3 million (22%), service
revenues increased $900,000 (22%) and sales decreased $1 million (4%) as
compared to the prior year. Domestic markets represent the growth in Access
revenues as international Access revenues decreased 5% over the prior year.
HydroMilling and HydroCleaning services revenues increased $1.3 million (10%) as
compared to the prior year. The $14.4 million contract for parking garage
rehabilitation services at the John F. Kennedy Center for the Performing Arts in
Washington, D.C. was completed during early fiscal 1997.
Gross profit expressed as a percent of revenue (the gross margin rate) was
39% in fiscal 1997 compared with 40% in fiscal 1996. The gross margin rate is
dependent on the mix of revenue types, which include sales, services, and
rentals; and the mix of spare parts and systems in sales revenues. The gross
margin rate on product sales improved to 41% from 40% in the prior year. The
gross margin rate on the UHP and Automation sales was 41% for the year, a
decrease from 42% in the prior year. This decrease was primarily a result of a
revenue mix shift towards systems sales. In general, UHP systems sales have
gross margins less than 40% and spare parts sales have margins in excess of 50%.
Systems sales represent 64% of fiscal 1997 UHP and Automation revenues, up from
61% in the prior year. The Access business' product sales gross margin rate
improved to 36% from 33%, primarily as a result of product mix. The gross
margin rate on Services revenues decreased to 25% from 27% in the prior year as
several large HydroMilling and HydroCleaning projects had lower than expected
gross margins. The margin on HydroMilling and HydroCleaning revenue is dependent
on the mix of services provided and the utilization of the equipment. The
rental gross margin rate decreased to 48% from 53% in the prior year. This was
primarily a result of increased depreciation expense associated with additions
to the Company's rental assets. Slow moving and obsolete inventory provisions
decreased by $455,000, net of additions.
With the increasing acceptance of UHP technology as the machine tool of
choice, as well as recent developments which utilize core UHP technology in
liquid food processing, the management of Flow determined that refocusing Flow
solely back to UHP was in the best interest of the Company. As a result, during
the fourth quarter the Company announced its intent to divest itself of its
Access and Services businesses and has retained an investment banker to assist
in developing strategic alternatives. Access is comprised of the following
business units: Spider Staging Corporation, Power Climber and affiliated
companies, Ark Systems and Consortium Europeen du Materiel ("CEM"). The
HydroMilling and HydroCleaning operations represent the Services business.
Management has determined the most appropriate strategy is to sell the Access
and Services businesses either individually or together. This process is
expected to be completed during the second quarter of fiscal 1998. During
fiscal 1997 the Company recorded $9 million in expenses associated with the
planned sale of these businesses. The primary components of these expenses are:
Write down of assets to net realizable value $7.4 million
Restructuring costs to be incurred in fiscal 1998 1.3 million
Restructuring costs incurred during fiscal 1997 .3 million
These costs are included as a separate component of operating expenses.
The net realizable value of assets to be sold was estimated by management
utilizing an analysis prepared by the investment banker. Excluding this
restructuring charge, pre-tax income increased $1 million (11%) over the prior
year.
The following table summarizes the operating results of the Access and
Services operations for the year ended April 30,
1997 1996 1995
---- ---- -----
Revenue $55,761 $52,334 $44,881
Gross Profit 19,516 18,286 15,207
Operating Income 4,593 5,509 4,038
Pre-tax Income 3,628 4,451 2,639
These amounts do not include allocation of corporate expenses, and subsequent
to the divestiture management expects to reduce yearly corporate expenses by
approximately $1.8 million.
The following discussion of operating expenses excludes the restructuring
charge of $9 million. Operating expenses increased by $6.7 million (15%) over
the prior year, however expressed as a percentage of revenues, total expenses
decreased to 31% from 32% in the prior year. Marketing expenses increased $4.9
million (22%). This increase results in part from higher selling expenses
associated with an increased revenue base. Marketing expenses represent 16% of
revenues as compared to 15% of revenues in fiscal 1996. Research and engineering
expenses increased $600,000 (8%), however as a percent of revenues they
decreased to 5% from 6% in the prior year. General and administrative expenses
of $16.4 million, which increased $1.2 million (8%), decreased to 10% of
revenues from 11% as compared to last year.
Operating income can vary significantly for domestic and foreign operations
(see Note 14 of Notes to Consolidated Financial Statements), but is primarily
the result of product mix variations and volume from year to year. There are no
known trends that management expects to result in a materially unfavorable
impact on revenues or income from operations.
Net interest expense increased by $334,000 (10%) in fiscal 1997 compared to
1996. This increase is a result of higher debt levels associated with an
increased level of capital additions, as well as a $1.5 million equity
investment in Western Garnet International Ltd., the primary supplier of the
Company's garnet.
During fiscal 1997, other expense, net, totaled $46,000 compared to other
income, net, of $648,000 in 1996. The 1997 results include $698,000 of income
associated with minority interest in net losses of the joint ventures, an
increase of $205,000 over the prior year. Also included in the current year is
approximately $600,000 associated with foreign exchange losses related to the
strengthening U.S. Dollar versus the Deutschemark. Fiscal 1996 contained a
$175,000 gain on the sale of stock held by the Company.
Income tax expense for fiscal 1997 was 25% of income before tax as compared
to 20% in the previous year. Income tax expense was lower than the statutory
rate in both fiscal 1997 and 1996 primarily due to lower tax rates in certain
foreign jurisdictions, the benefit of the Company's foreign sales corporation,
and changes in the Company's valuation allowance.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues for the year ended April 30, 1996 increased $34.9 million (32%)
from the prior year period. UHP revenues, including HydroMilling and
HydroCleaning services, increased $29.6 million (39%), while Access systems
revenues increased $5.3 million (16%) over the prior year period. The European
and domestic UHP markets continued their strong growth with revenue increases of
57% and 13%, respectively, over the prior year. Also contributing to overall
growth was the effect of the businesses acquired and partnerships entered into
during the third and fourth quarters of fiscal 1995 and the first quarter of
fiscal 1996. In May 1995, the Company invested in a majority interest in a
joint venture with Okura & Co., Ltd., its exclusive Japanese distributor. This
joint venture supplies UHP products in Japan and to Japanese companies in Asia.
Sales into Asia increased 140% over the prior year; however, most of this
represented sales by the recent Japanese joint venture. UHP spare parts and
services revenues increased by $7.5 million (26%), reflecting an increased base
of UHP waterjet systems installed throughout the world, as well as inclusion of
the Japanese joint venture. Exclusive of this joint venture, spare parts sales
were up 11% over the prior year. The increase in Access systems revenues came
principally from international markets as domestic revenues increased less than
3% over the prior year. HydroMilling and HydroCleaning services revenues
increased $2.2 million (19%) reflecting several large contracts received during
the year.
Gross profit expressed as a percent of revenue was 40% in fiscal 1996
compared with 42% in fiscal 1995. The decrease in the gross profit percent for
the year was primarily due to a shift in revenue mix towards complex systems
involving the robotics and factory automation technology acquired in the third
quarter of fiscal 1995. These types of systems generally carry lower gross
profit percents than other UHP products. Additionally, the gross margin percent
was negatively impacted from the under-capacity utilization of the robotics
unit. Rental gross profit percent decreased to 53% from 56% in the prior year.
This was primarily a result of increased depreciation expense associated with
additions to the Company's rental assets. Slow moving and obsolete inventory
provisions increased by $147,000, net of disposals.
Expenses increased by $11 million (32%), primarily as a result of the
inclusion of acquisitions completed during late fiscal 1995 and early fiscal
1996. Exclusive of the acquisitions, operating expenses increased $3.5 million
(11%) over the prior year. However, expressed as a percentage of revenues,
total expenses remain comparable to the prior year at 31.5%. The resolution of
a pre-acquisition contingency related to the valuation of work in process
inventory of a fiscal 1995 acquisition resulted in an additional $600,000 of
goodwill being recorded during fiscal 1996. Goodwill amortization increased
approximately $480,000 over the prior year.
Operating income can vary significantly for domestic and foreign operations
(see Note 14 of Notes to Consolidated Financial Statements), but is primarily
the result of product mix variations and volume from year to year.
Net interest expense increased by $1.1 million (48%) in fiscal 1996
compared to 1995. Approximately $650,000 of the increase relates to borrowings
to finance fiscal 1995 acquisitions and a joint venture during the first quarter
of fiscal 1996.
During fiscal 1996, other income, net, totaled $648,000, compared to other
expense, net, of $30,000 in 1995. The 1996 results include $493,000 of income
associated with minority interest in net losses of the joint ventures and a
$175,000 gain on the sale of stock held by the Company.
Income tax expense for fiscal 1996 was 20% of income before tax as compared
to 17% in the previous year. Income tax expense was lower than the statutory
rate in both fiscal 1996 and 1995 primarily due to lower tax rates in certain
foreign jurisdictions, the benefit of the Company's foreign sales corporation
and changes in the Company's valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $3.7 million in cash flow from operations during the
year. In the prior year the Company used $1.3 million in its operating
activities. The Company invested $9.2 million in property and equipment during
fiscal 1997. The Access and Services operations accounted for $6.3 million of
this capital investment. Total debt at April 30, 1997 was $55.3 million, up
$6.4 million (13%) 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 for the next
twelve months. The Company's Credit Agreement and Private Placement require the
Company to comply with certain financial covenants. The covenants were amended
so as to exclude restructuring charges associated with the divestiture of the
Access and Services businesses. As of April 30, 1997, the Company was in
compliance with all such covenants, as amended. Management anticipates the
Company will maintain compliance with all such covenants subsequent to the
divestiture of Access and Services.
See Note 8 of Notes to Consolidated Financial Statements for a schedule of
long-term debt maturities. Long-term debt obligations are expected to be met
from working capital provided by operations and, as necessary, by other
indebtedness.
Capital spending plans currently provide for outlays of approximately $3
million to $5 million in fiscal 1998. It is expected that funds necessary for
these expenditures will be generated internally, and through available credit
facilities.
Gross trade accounts receivable of $41.1 million at April 30, 1997
increased $4.4 million (12%) from April 30, 1996 This increase was principally
due to higher fourth quarter revenues. Days' sales outstanding in gross
accounts receivable remains comparable to the prior year but continues to be
negatively impacted by the traditionally longer payment cycle outside the United
States. Additionally, longer payment terms are sometimes negotiated on large
system orders. The Company's management does not believe these timing issues
will present a material adverse impact on the Company's short-term liquidity
requirements.
The inventory increase of $3.9 million (11%) is related primarily to higher
levels of business. Certain products manufactured by the Company's robotics and
automation divisions require an extended manufacturing period, and therefore
involve higher levels of work in process. The amount provided for obsolete and
slow-moving goods at April 30, 1997 decreased $455,000, net of additions, from
April 30, 1996.
It is the Company's policy to hedge net assets denominated in foreign
currencies (primarily the Deutschemark) where significant currency rate
fluctuations may impact profitability.
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Management is responsible for the fair and accurate presentation of
information in this annual report. The financial statements and related notes
have been prepared in accordance with generally accepted accounting principles.
Financial and operating information comes from Company records and other
sources. Certain amounts are, of necessity, based on judgment and estimation.
We believe that adequate accounting systems and financial controls are
maintained to ensure that the Company's records are free from material
misstatement and to protect the Company's assets from loss or unauthorized use.
In addition, the Audit Committee of the Board of Directors periodically meets
with Price Waterhouse LLP and management to review the work of each, to discuss
financial reporting matters, and to review auditing and internal control
procedures.
/s/ Stephen D. Reichenbach
--------------------------
Stephen D. Reichenbach
Executive Vice President and
Chief Financial Officer
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are filed as a part of this
report:
INDEX TO FINANCIAL STATEMENTS PAGE IN THIS REPORT
Report of Independent Accountants 21
Consolidated Balance Sheets at April 30, 1997 and 1996 22
Consolidated Statements of Income for each of the three
years in the period ended April 30, 1997 23
Consolidated Statements of Cash Flows for each of
the three years in the period ended April 30, 1997 24
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period
ended April 30, 1997 26
Notes to Consolidated Financial Statements 27
FINANCIAL STATEMENT SCHEDULES
VIII -- Valuation and Qualifying Accounts 46
All other schedules are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Flow International Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Flow International Corporation and its subsidiaries at April 30,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended April 30, 1997, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Seattle, Washington
June 3, 1997
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
April 30,
--------------------
1997 1996
---- ----
ASSETS:
Current Assets:
Cash $2,479 $3,845
Trade Accounts Receivable, less
allowances for doubtful accounts of $1,008 and
$1,186, respectively 40,050 35,467
Inventories, net 38,471 34,589
Deferred Income Taxes 4,758 1,965
Other Current Assets 4,959 4,978
----------------------
Total Current Assets 90,717 80,844
Property and Equipment, net 25,594 27,083
Intangible Assets, net of accumulated amortization of
$4,441 and $3,294, respectively 11,471 13,901
Deferred Income Taxes 515 699
Other Assets 5,169 3,966
----------------------
$133,466 $126,493
----------------------
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes Payable $1,651 $2,304
Current Portion of Long-Term Obligations 79 1,035
Accounts Payable 11,619 12,088
Accrued Payroll and Related Liabilities 4,564 3,942
Other Accrued Taxes 1,139 590
Other Accrued Liabilities 3,539 3,019
----------------------
Total Current Liabilities 22,591 22,978
Long-Term Obligations 53,569 45,590
Minority Interest 553 865
Stockholders' 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, 14,925,627 and 14,544,810 shares
issued and outstanding, respectively, in 1997
14,784,647 and 14,508,244 shares issued and
outstanding, respectively, in 1996 149 148
Capital in Excess of Par 38,871 38,038
Retained Earnings 19,266 18,541
Treasury Common Stock, at cost, 380,817 and 276,403
shares, respectively (1,429) (556)
Cumulative Translation Adjustment 101 981
Unrealized loss on equity securities available
for sale (205)
Loan to Employee Stock Ownership Plan & Trust - (92)
----------------------
Total Stockholders' Equity 56,753 57,060
----------------------
Commitments and Contingencies (Note 13)
----------------------
$133,466 $126,493
----------------------
----------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended April 30,
-----------------------------------
1997 1996 1995
---- ----- -----
Revenue:
Sales $135,087 $117,090 $84,800
Services 20,336 17,355 15,256
Rentals 12,770 10,460 9,954
---------------------------------------
Total Revenues 168,193 144,905 110,010
Cost of Sales:
Sales 80,151 69,889 48,454
Services 15,241 12,653 10,850
Rentals 6,650 4,933 4,395
---------------------------------------
Total Cost of Sales 102,042 87,475 63,699
---------------------------------------
Gross Profit 66,151 57,430 46,311
Expenses:
Marketing 27,173 22,281 16,582
Research and Engineering 8,749 8,110 6,784
General and Administrative 16,432 15,282 11,282
Restructuring 8,951
---------------------------------------
61,305 45,673 34,648
---------------------------------------
Operating Income 4,846 11,757 11,663
Interest Expense, net (3,837) (3,503) (2,374)
Other Income (Expense), net (46) 648 (30)
---------------------------------------
Income Before Provision for Income
Taxes 963 8,902 9,259
Provision for Income Taxes 238 1,817 1,531
---------------------------------------
Net Income $ 725 $7,085 $7,728
---------------------------------------
---------------------------------------
Net Income per Common and Equivalent Shares $ .05 $ .47 $ .53
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended April 30,
---------------------------------
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities:
Net Income $ 725 $ 7,085 $ 7,728
Adjustments to Reconcile Net Income to Cash
Provided (Used) by Operating Activities:
Depreciation and amortization 7,472 6,856 5,199
Restructuring provision 8,951
Provision for losses on trade accounts receivable 704 576 480
Provision for slow moving and obsolete inventory 83 207 324
Tax effect of exercised stock options 284 170 164
Other 92 92 92
(Increase) Decrease in Current Assets,
net of effects of restructuring and business combinations:
Trade Accounts Receivable (5,960) (4,032) (2,651)
Inventories (4,029) (6,482) (1,516)
Other Current Assets (46) (248) (29)
Deferred Income Taxes (2,793) (630) 87
Increase (Decrease) in Current Liabilities,
net of effects of restructuring and business combinations:
Accounts Payable (469) (1,135) (1,378)
Accrued Payroll and Related Liabilities 622 383 796
Other Accrued Taxes 549 (48) 372
Other Accrued Liabilities (878) 229 (813)
Increase in Intangible Assets (601) (400)
Increase in Other Long-Term Assets (1,165) (2,361) (39)
(Decrease) Increase in Other Long-Term Liabilities (484) (1,336) 192
------ -------- -------
Cash provided (used) by operating activities 3,658 (1,275) 8,608
------ -------- -------
Cash Flows from Investing Activities:
Expenditures for property and equipment (9,153) (8,820) (5,584)
Investment in equity securities (1,500)
Payment for business combinations (186) (11,850)
Other 462 445 17
------ -------- -------
Cash used by investing activities (10,191) (8,561) (17,417)
------ -------- -------
Cash Flows from Financing Activities:
Borrowings (repayments) under line of credit agreements, net 8,585 16,771 (232)
Proceeds from bridge loan 1,636 12,364
Repayment of bridge loan (14,000)
Proceeds from long-term obligations 184 17,366 287
Payments of long-term obligations (2,399) (9,076) (4,397)
Proceeds from issuance of common stock 550 268 194
Treasury stock repurchased and received in
settlement of obligations (873) - -
------ -------- -------
Cash provided by financing activities 6,047 12,965 8,216
------ -------- -------
Effect of exchange rate changes (880) (358) 316
------ -------- -------
Increase (decrease) in cash and cash equivalents (1,366) 2,771 (277)
Cash and cash equivalents at beginning of period 3,845 1,074 1,351
------ -------- -------
Cash and cash equivalents at end of period $ 2,479 $ 3,845 $ 1,074
------ -------- -------
------ -------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year Ended April 30,
--------------------------------------
1997 1996 1995
------ -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $3,707 $3,572 $2,273
Income Taxes 2,091 3,024 740
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value of assets acquired (Note 2) $2,860 $23,175
Cash paid, stock issued and notes assumed for assets acquired (597) (14,965)
-------- --------
Liabilities assumed $2,263 $ 8,210
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Loan to
Common Stock Employee Unrealized
------------------------- Capital Cumulative Treasury Stock Loss on
Par In Excess Retained Translation Common Ownership Equity
Shares Value of Par Earnings Adjustment Stock Plan & Trust Securities
-------------------------------------------------------------------------------------------------------
Balances, April 30, 1994 14,031 $ 140 $33,889 $ 3,728 $ 1,023 $(556) $(276) $ -
-------------------------------------------------------------------------------------------------------
Issuance of Stock 445 5 3,111
Exercise of Stock Options 127 1 356
Effect of Exchange
Rate Changes 316
Other 246 92
Net Income 7,728
-------------------------------------------------------------------------------------------------------
Balances, April 30, 1995 14,603 146 37,602 11,456 1,339 (556) (184)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Exercise of Stock Options 182 2 266
Effect of Exchange Rate
Changes (358)
Other 170 92
Net Income 7,085
-------------------------------------------------------------------------------------------------------
Balances, April 30, 1996 14,785 148 38,038 18,541 981 (556) (92)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Exercise of Stock Options 141 1 549
Effect of Exchange Rate
Changes (880)
Repurchase of Treasury
Stock (498)
Other 284 (375) 92 (205)
Net Income 725
--------------------------------------------------------------------------------------------------------
Balances, April 30, 1997 14,926 $ 149 $38,871 $19,266 $101 $(1,429) $ - $ (205)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three years ended April 30, 1997
(All tabular dollar amounts in thousands, except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Flow International
Corporation, ("Flow" or the "Company"), and its wholly-owned subsidiaries, Flow
Europe GmbH ("Flow Europe"), Flow Asia Corporation ("Flow Asia"), Rampart
Waterblast, Inc., Spider Staging Corporation ("Spider"), Power Climber and
affiliated companies ("Power Climber"), Dynovation Inc. ("Flow Automation") and
three majority owned joint ventures including Flow Japan Corporation ("Flow
Japan"). All significant intercompany transactions have been eliminated.
OPERATIONS
The Company develops and manufactures ultrahigh-pressure ("UHP") waterjet
cutting, cleaning and factory automation systems, and powered access equipment
for the manufacturing, industrial cleaning and construction services markets.
The Company provides products to a wide variety of industries, including the
automotive, aerospace, disposable products, food processing, and construction
industries. Equipment is designed, developed, and manufactured at the Company's
principal facilities in Kent, Washington, and at manufacturing facilities in
Johnstown, Pennsylvania; Jeffersonville, Indiana; and in Burlington, Canada.
The Company markets its products to customers worldwide through its principal
offices in Kent, its subsidiaries in Belgium, Canada, Germany, Japan, and
Taiwan, and through regional offices in major U.S. cities.
REVENUE RECOGNITION
Revenues are recognized at the time of shipment for products and certain
types of systems, and under percentage of completion, measured by the cost to
cost method, for other types of systems, and at the time of service or rental
with respect to service and rental revenues. Products are warranted to be free
from material defects for a period of one year from the date of shipment.
Warranty obligations are limited to the repair or replacement of products. The
Company's warranty accrual is reviewed quarterly by management for adequacy
based upon recent shipments and historical warranty expense. Credit is issued
for product returns upon receipt of the returned goods, or, if material, at the
time of notification and approval.
Services revenues primarily consist of revenues related to hydrodemolition
services. Rental revenues consist of charges to customers for the temporary use
of access system equipment.
PRODUCT LIABILITY
The Company is obligated under terms of its product liability insurance
contracts to pay all costs up to deductible amounts. Included in general and
administrative expense are insurance, investigation and legal defense costs.
Legal settlements, if any, are included in other expense.
INVENTORIES
Inventories are stated at the lower of cost, determined by using the
first-in, first-out method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation for financial
reporting purposes is provided using the straight-line method over the estimated
useful lives of the assets which range from three to eleven years. Leasehold
improvements are amortized over the related lease term.
RECORVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS:
The Company reviews most long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used in its
business annually for impairment, or whenever events or changes in circumstances
indicate that the carrying amount of an asset or a group of assets may not be
recoverable in accordance with Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of". An impaired asset is written down to its estimated
fair market value based on the best information available. The Company
generally measures estimated fair market value by discounting estimated future
cash flows. Accordingly, actual results could vary significantly from such
estimates.
INTANGIBLE ASSETS
Intangible assets represent goodwill which is amortized on a straight-line
basis over fifteen years.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. If it is more likely than
not that some portion of a deferred tax asset will not be realized, a valuation
allowance is recorded.
EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of shares outstanding plus
the common stock equivalents attributable to dilutive stock options during each
period.
The weighted average number of shares outstanding, including equivalent
shares where required, for the years ended April 30, 1997, 1996, and 1995 were
15,054,000, 15,071,000, and 14,460,000, respectively. Fully diluted earnings
per share do not differ materially from primary earnings per share. Equivalent
shares are not included as shares outstanding in loss per share calculations.
Statement of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings
Per Share" will be adopted during fiscal 1998. Applying the provisions of FAS
128, the proforma basic earnings per share would have been $.05,$.49 and $.56
for the fiscal years ending 1997, 1996 and 1995, respectively. The proforma
diluted earnings per share would not differ from the amounts reported in the
accompanying Consolidated Statements of Income.
FOREIGN CURRENCY TRANSLATION
The functional currency of Flow Asia is the New Taiwan dollar; of Flow
Europe, the U.S. dollar; of Flow Automation, the Canadian dollar; of Power
Climber N.V. (part of Power Climber), the Belgian franc; and of Flow Japan, the
Japanese yen. All assets and liabilities of these foreign subsidiaries are
translated at year-end or historical exchange rates, as appropriate. Income and
expense accounts of the foreign subsidiaries are translated at the average rates
in effect during the year, except that Flow Europe depreciation and cost of
sales are translated at historical rates. Adjustments resulting from the
translation of Flow Asia, Flow Automation, Power Climber N.V., and Flow Japan's
financial statements are recorded in the cumulative translation adjustment
account in the stockholders' equity section of the accompanying Consolidated
Balance Sheets. Adjustments resulting from the remeasurement of Flow Europe's
accounts are included in the accompanying Consolidated Statements of Income.
The Company utilizes forward exchange contracts and local currency
borrowings to hedge its exposure to exchange rate fluctuations in connection
with monetary assets and liabilities held in foreign currencies. The Company
held forward exchange contracts maturing on various dates through June 1997 with
a face value of approximately $480,000 at April 30, 1997 and $1.1 million at
April 30, 1996. Unrealized gains associated with these forward contracts of
$17,000 and $26,000 at April 30, 1997 and 1996, respectively are included in the
caption Other Income (Expense), net in the accompanying Consolidated Statements
of Income. For the years ended April 30, 1997, 1996 and 1995 a net foreign
exchange loss of $590,000, $183,000 and $48,000, respectively, is included in
the caption Other Income (Expense), net in the accompanying Consolidated
Statements of Income.
STATEMENTS OF CASH FLOWS
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers short-term investments with maturities from the date of purchase of
three months or less, if any, to be cash equivalents.
CONCENTRATION OF CREDIT RISK
In countries or industries where the Company is exposed to material credit
risk, sufficient collateral, including cash deposits and/or letters of credit,
is required prior to the completion of a transaction. The Company does not
believe there is a material credit risk beyond that provided for in the
financial statements in the ordinary course of business. The Company makes use
of foreign exchange contracts to cover some transactions denominated in foreign
currencies, and does not believe there is an associated material credit or
financial statement risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments on the balance sheet as of April 30, 1997 and
1996 are valued at cost which approximates fair value with the exception of the
Company's investment in Phenix Composites, Incorporated, ("Phenix") (see Note
5).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
that are particularly susceptible to significant change in the near term are the
restructuring charge (see Note 4), percentage of completion estimates and the
adequacy of the allowance for obsolete inventory, warranty obligations and
doubtful accounts receivable.
MINORITY INTERESTS IN JOINT VENTURES
The Company includes income or expense associated with the minority
interest in joint ventures as part of Other Income (Expense), net in the
accompanying Consolidated Statements of Income.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
NOTE 2 - BUSINESS COMBINATIONS:
- --------------------------------------------------------------------------------
On November 11, 1994, Spider entered into a licensing agreement with Ark
Systems, Inc. ("Ark") at a cost of $400,000. This division of the Company
designs and manufactures a range of access containment systems which are used in
under-bridge applications for surface preparation, lead-paint abatement,
cleaning and maintenance. The agreement gives Spider the exclusive worldwide
marketing and manufacturing rights to the Ark product line for five years.
On December 15, 1994, the Company purchased substantially all of the assets
and assumed substantially all of the liabilities of Dynovation Machine Systems,
Inc. for consideration of $7,970,000. The difference between the net fair market
value of assets acquired and consideration given has been recorded as goodwill.
This company, now called Flow Automation, designs and manufactures robotic
waterjet cutting cells and automated assembly systems. Results have been
included in the consolidated financial statements from the date of acquisition
based upon the purchase method of accounting.
On January 3, 1995, the Company purchased certain net assets of ASI
Robotics Systems ("Flow Robotics") for consideration of $3,500,000 and 445,000
shares of Company common stock. The difference between the net fair market value
of assets acquired and consideration given has been recorded as goodwill. Flow
Robotics designs and manufactures high accuracy gantry robots and related
systems used in waterjet and other applications. Results of this division have
been included in the consolidated financial statements from the date of
acquisition based upon the purchase method of accounting.
In April 1995, Power Climber N.V. invested approximately $380,000 to become
a majority partner in a joint venture with Consortium Europeen du Materiel
("CEM"). CEM operates three access systems sales, service and rental operations
in France.
In May 1995, the Company invested approximately $600,000 in a majority
interest in a joint venture with Okura & Co., Ltd., its exclusive Japanese
distributor, to form Flow Japan. The joint venture supplies the Japanese market
with UHP equipment.
NOTE 3 - PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
- --------------------------------------------------------------------------------
If Dynovation Machine Systems, Inc.'s net assets had been acquired at the
beginning of the year ended April 30, 1995 , the results of the operations of
Flow would be adjusted as follows on a pro forma basis. Total revenues would
have been $117,190,000, and net income would have been $7,178,000, or $.50 per
share. The adjustments to net income include additional interest expense of
$369,000, and additional goodwill amortization of $317,000. The pro forma
consolidated financial information is presented for information purposes only,
does not take into account savings which may have been realized from the
combination of the Company and
Dynovation Machine Systems, Inc., and is not indicative of the actual
consolidated financial position or results of operations in the future.
NOTE 4 - RESTRUCTURING:
- --------------------------------------------------------------------------------
With the increasing acceptance of UHP technology as the machine tool of
choice, as well as recent developments which utilize core UHP technology in
liquid food processing, the management of Flow determined that refocusing Flow
solely back to UHP was in the best interest of the Company. As a result, in
February 1997 the Company announced its intent to divest itself of its Access
and Services businesses and has retained an investment banker to assist in
developing strategic alternatives. Access is comprised of the following
business units: Spider, Power Climber, Ark and CEM. The Services business
represents the HydroMilling-Registered Trademark- and HydroCleaning-TM-
operations. Management expects to complete this process during the second
quarter of fiscal 1998. During fiscal 1997 the Company recorded $9 million in
expenses associated with the planned sale of these businesses. The primary
components of these expenses are:
Write down of assets to net realizable value $7.4 million
Restructuring costs to be incurred in fiscal 1998 1.3 million
Restructuring costs incurred during fiscal 1997 .3 million
These costs are included as a separate component of operating expenses.
The net realizable value of assets to be sold was estimated by management
utilizing an analysis prepared by the investment banker.
The following table summarizes the operating results of the Access and
Services operations for the year ended April 30,
1997 1996 1995
-------- -------- ----------
Revenue $55,761 $52,334 $44,881
Gross Profit 19,516 18,286 15,207
Operating Income 4,593 5,509 4,038
Pre-tax Income 3,628 4,451 2,639
NOTE 5 - RELATED PARTY TRANSACTIONS:
- --------------------------------------------------------------------------------
In August 1992, the Company entered into a stock purchase agreement with
Phenix . The Company contributed cash and certain equipment valued at cost.
The book value of the investment is $484,000 at April 30, 1997 and 1996 and is
being accounted for under the cost method. During fiscal 1996 the Company sold
46,153 shares representing 20.6% of its holdings
of Phenix and recorded a gain of $175,000 which is included in other income.
Currently, the Company's CEO and president is a member of the board of directors
of Phenix.
During fiscal 1997 the Company purchased 369,791 shares or 3.1% of Western
Garnet International Ltd. ("Western Garnet") for $1.5 million. Western garnet
is a publicly traded company on the Toronto stock exchange. Garnet is a
consumable used in abrasivejet cutting and this investment was made to secure a
long term relationship with the Company's supplier of its high quality garnet.
The Company classifies this investment as available- for-sale under Statement of
Financial Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Based upon the April 30, 1997 closing stock price of
Western Garnet, the Company recorded an unrealized loss of $205,000 which is
reflected in the equity section of the accompanying Consolidated Balance Sheets.
Currently, the Company's CEO and president is a member of the board of directors
of Western Garnet.
NOTE 6 - INVENTORIES:
- --------------------------------------------------------------------------------
Inventories consist of the following:
April 30,
1997 1996
----------------------
Raw Materials and Parts $25,793 $23,334
Work in Process 5,872 6,339
Finished Goods 8,703 7,268
----------------------
40,368 36,941
Less: Provision for Slow-Moving
and Obsolete Inventory 1,897 2,352
----------------------
$38,471 $34,589
----------------------
----------------------
NOTE 7 - PROPERTY AND EQUIPMENT:
- --------------------------------------------------------------------------------
Property and equipment are as follows:
April 30,
1997 1996
----------------------
Land and Buildings $ 511 $ 592
Machinery and Equipment 51,334 47,132
Furniture and Fixtures 2,469 2,730
Leasehold Improvements 6,254 5,864
Construction in Progress 1,442 2,132
----------------------
62,010 58,450
Less:
Accumulated Depreciation and Amortization 34,288 31,367
Net Realizable Value Provision 2,128
----------------------
$25,594 $27,083
----------------------
----------------------
NOTE 8 - LONG-TERM OBLIGATIONS AND NOTES PAYABLE:
Long-term obligations are as follows:
April 30,
1997 1996
---------------------
Flow Line of Credit $36,648 $28,079
Private Debt Placement 15,000 15,000
Term Loans Payable 1,754 3,160
Guarantee of ESOP Loan 92
Power Climber Acquisition Note 246 294
----------------------
53,648 46,625
Less: Current Portion 79 1,035
----------------------
$53,569 $45,590
----------------------
----------------------
Current notes payable are as follows:
April 30,
1997 1996
----------------------
Flow Japan Notes Payable $1,261 $1,523
Power Climber N.V. Notes Payable 360 460
Flow Automation Notes Payable 77
Other Notes Payable 30 244
----------------------
$1,651 $2,304
----------------------
----------------------
The Company's Credit Agreement provides for a revolving line of credit of
up to $60 million, split equally between two financial institutions, which
expires on November 30, 2000. The amount which can be borrowed is limited based
upon certain debt covenant restrictions. Interest rates under the Credit
Agreement are at the bank's prime rate or are linked to LIBOR, at the Company's
option. The funded debt ratio determines the LIBOR based interest rate. The
Company has borrowed $36.6 million under the Credit Agreement as of April 30,
1997, the majority of which carries an interest rate of LIBOR plus 1.35%. LIBOR
at April 30, 1997 was 5.69%. The Company pays 0.1% as an unused commitment fee.
As of April 30, 1997, the Company has approximately $8.6 million of available
domestic unused line of credit
The Private Debt Placement is a ten-year note with seven equal principal
payments beginning in September 1999. The Company pays interest semi-annually
at a fixed rate of 7.2%. The Credit Agreement and Private Debt Placement are
collateralized by a general lien on the Company's assets. The Company is
required to comply with certain covenants relating to the Credit Agreement and
Private Debt Placement including restrictions on dividends and transactions with
affiliates, limitations on additional indebtedness, and maintenance of tangible
net worth, working capital, fixed charge coverage, funded debt and debt service
ratios. The covenants were amended so as to exclude the restructuring charges
(see Note 4) associated with the divestiture of the Access and Services
businesses. As of April 30, 1997, the Company was in compliance with all such
covenants, as amended.
Term loans payable at April 30, 1997 include: -
$1.2 million denominated in Deutschemarks. A $2.5 million standby letter
of credit has been issued by the Company's principal bank to the Company's
German bank, to secure a credit facility for use by Flow Europe. Interest is
payable monthly at a rate of 5%, with principal due in fiscal 1999. At April
30, 1997, Flow Europe had an unused $1.3 million credit facility.
Approximately $130,000 in debt denominated in Belgian francs at interest
rates ranging from 5.0% to 9.8% at April 30, 1997. This debt is secured via a
standby letter of credit issued by the Company's principal bank. Principal and
interest is paid monthly through fiscal 1999.
Approximately $340,000 in term debt denominated in French francs at
interest rates ranging from 7.6% to 8.3% at April 30, 1997. This debt is
collaterialized by trade accounts receivable and inventory. Principal and
interest is paid monthly through fiscal 1999.
In September 1989, the Company guaranteed a loan of $844,000 funding the
purchase of 250,000 shares of the Company's common stock by the Flow
International Corporation Employee Stock Ownership Plan and Trust (the "ESOP").
The loan bears interest, payable quarterly, at 93% of the bank's prime rate and
was paid in full during fiscal 1997 (see Note 10).
In April 1993, the Company executed unsecured promissory notes totaling
$2,262,000 to the previous owners of Power Climber in conjunction with the
acquisition of assets. During fiscal 1996 the Company elected to payoff all but
one of the promissory notes. The remaining note requires monthly payment of
principal and interest, at 7.25%, through fiscal 2003.
A $1 million standby letter of credit has been issued by the Company's
principal bank to the Company's Japanese bank, to secure a credit facility for
use by Flow Japan. The notes payable by Flow Japan are denominated in Japanese
yen at interest rates ranging from 1.6% to 2.3% at April 30, 1997. Flow Japan
has approximately $48,000 in unused credit facilities at their Japanese bank as
of April 30, 1997.
The notes payable by Power Climber N.V. are denominated in Belgian francs,
and provide for interest at 5.0% at April 30, 1997. These notes are partially
secured by a $650,000 standby letter of credit issued by the Company's bank as
well as collaterialized by trade accounts receivable and inventory. Power
Climber N.V. has approximately $1,464,000 in unused credit facilities at April
30, 1997.
The notes payable by Flow Automation are collateralized by trade accounts
receivable and inventory, and are denominated in Canadian dollars at an interest
rate of Canadian prime plus 0.5%. Flow Automation has approximately $430,000 in
unused credit facilities at April 30, 1997.
Principal payments under long-term obligations for the next five years and
thereafter are as follows: $79,000 in 1998, $3,917,000 in 1999, $2,190,000 in
2000, $38,834,000 in 2001, $2,196,000 in 2002, and $6,432,000 thereafter.
NOTE 9 - INCOME TAXES:
- --------------------------------------------------------------------------------
The components of consolidated income before income taxes and the provision for
income taxes are as follows:
Year Ended April 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Income Before Income Taxes:
Domestic $2,509 $8,038 $8,994
Foreign (1,546) 864 265
------- ------ ------
Total $ 963 $8,902 $9,259
------- ------ ------
------- ------ ------
The provision for income taxes comprises:
Year Ended April 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Current Tax Expense:
Domestic $ 1,952 $ 2,453 $ 749
State and Local 261 281 271
Foreign 476 630 63
------- ------ ------
Total 2,689 3,364 1,083
Deferred Tax Liability (Benefit) (2,451) (1,547) 448
------- ------ ------
Total Provision for Income Taxes $ 238 $1,817 $1,531
------- ------ ------
------- ------ ------
Net deferred tax assets (liabilities) comprise the following:
April 30, 1997 April 30, 1996
--------------- ----------------
Fixed assets ($ 648) ($ 525)
Obsolete inventory provisions 400 543
Restructuring charge 3,043
Net operating loss carryover 4,394 3,420
Subpart F income 239 228
Foreign taxes (500) (412)
Accounts receivable allowances 82 66
Inventory capitalization 91 134
AMT Credits 225 1,234
All other 446 383
----- -----
Subtotal 7,772 5,071
Valuation allowance (2,499) (2,407)
------ ------
Total Net Deferred Taxes $5,273 $2,664
------- -------
------- -------
A reconciliation of income taxes at the federal statutory rate to
the provision for income taxes is as follows:
Year Ended April 30,
-------------------------------------------
1997 1996 1995
------ ------ ------
Income taxes at federal statutory rate $327 $3,026 $3,148
Foreign sales corporation benefit (228) (196) (162)
Foreign operations expense (199) 279 541
Change in valuation allowance 92 (2,285) (2,504)
State and local taxes 261 281 179
Alternative minimum tax - domestic 822 200
Other (15) (110) 129
------- ------ ------
Income tax provision $ 238 $1,817 $1,531
------ ------ ------
------ ------ ------
As of May 1, 1997, the Company had approximately $5 million of net
operating loss carryforwards to offset certain Flow earnings for federal income
tax purposes. Of the $5 million carryforward, $1.2 million was currently
available. An additional $943,000 becomes available each fiscal year. These
net operating loss carryforwards expire in varying amounts through the year
2003.
Because of current and expected future earnings, the Company expects
increased utilization of its U.S. net operating loss carryforwards and tax
credits. Therefore, the U.S. valuation allowance was reduced by a net tax
effected amount of $1,084,000 in fiscal 1997. The foreign net operating loss
valuation allowance was increased by $1,176,000 in fiscal 1997.
Provision has not been made for U.S. income taxes or foreign withholding
taxes on $3.4 million of undistributed earnings of foreign subsidiaries. Those
earnings have been and will continue to be reinvested. These earnings could
become subject to additional tax if they were
remitted as dividends, if foreign earnings were lent to the Company or a U.S.
affiliate, or if the Company should sell its stock in the subsidiaries. It is
not practicable to estimate the amount of additional tax that might be payable
on the foreign earnings; however, the Company believes that U.S. foreign tax
credits would largely eliminate any U.S. tax and offset any foreign tax.
NOTE 10 - VOLUNTARY PENSION AND SALARY DEFERRAL PLAN AND ESOP PLAN:
- --------------------------------------------------------------------------------
The Company has a 401(k) savings plan in which employees may contribute a
percentage of their compensation. The Company makes contributions based on
employee contributions and length of employee service. Company contributions
and expenses under the plan for the years ended April 30, 1997, 1996, and 1995
were $709,000, $689,000, and $531,000, respectively.
In September 1989, the Company established an ESOP for all employees
meeting certain service requirements. Company contributions to the ESOP are
discretionary; however, the Company has agreed to make contributions as
necessary to fund the repayment of the ESOP loan (see Note 8). During the years
ended April 30, 1997, 1996 and 1995, the Company recorded compensation and
interest expense related to the ESOP of $108,000, $121,000 and $109,000,
respectively.
Note 11 - Stock Options:
- --------------------------------------------------------------------------------
The Company has stock options outstanding under various option plans
described below.
1984 RESTATED STOCK OPTION PLAN (THE "1984 RESTATED PLAN"). Approved by
the Company's shareholders in September 1984 and subsequently amended and
restated, the 1984 Restated Plan provides for grants to employees and
contractors to purchase a maximum of 1,800,000 shares of the Company's common
stock. The 1984 Restated Plan allows for the grant of either incentive or
nonqualified stock options.
ADMAC 1984 INCENTIVE STOCK OPTION PLAN (THE "ADMAC PLAN"). The ADMAC Plan
was adopted in September 1983. Options vested under the plan were converted
into Flow stock options when the Company acquired ADMAC, Inc. in February 1989.
No further grants can be made under the ADMAC Plan.
1987 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS (THE "1987 NONEMPLOYEE
DIRECTORS PLAN"). Approved by the Company's stockholders in September 1987, the
1987 Nonemployee Directors Plan, as subsequently amended, provides for the
automatic grant of nonqualified options for 10,000 shares of Company common
stock to a nonemployee director when initially elected or appointed, and
currently, the issuance of 5,000 shares annually thereafter during the term of
directorship.
OTHER NONEMPLOYEE DIRECTOR OPTIONS. In fiscal 1988, two separate stock
options were granted for 45,000 and 10,000 shares to two nonemployee directors.
1991 STOCK OPTION PLAN (THE "1991 SO PLAN"). The 1991 SO Plan was adopted
in October 1991 and amended in August 1993. Incentive and nonqualified stock
options up to 700,000 shares may be issued under this plan.
1995 LONG-TERM INCENTIVE PLAN (THE "1995 LTI PLAN"). The 1995 LTI Plan was
adopted in August 1995. Incentive and nonqualified stock options up to 750,000
shares may be issued under this plan.
During the years ended April 30, 1997, 1996 and 1995, a total of 141,000,
182,000 and 127,000 options, respectively, were exercised under all stock option
plans of the Company at an average price of $3.80, $3.04 and $1.52 per share,
respectively.
All options become exercisable upon a change in control of the Company.
Options have a two-year vesting schedule, and are granted at fair market value.
No compensation expense has been recorded in fiscal 1997, 1996 or 1995. The
following chart summarizes the status of the options at April 30, 1997:
--------------------------------------------------------------------------------
1984 Restated 1987 and Other 1991 SO
Plan
and Nonemployee and 1995
ADMAC Plan Directors Plan LTI Plan Total
- -------------------------------------------------------------------------------------------------------------------------------
Number of options 260,200 234,000 1,392,999 1,887,199
outstanding
Number of options vested 260,200 60,000 707,265 1,027,465
Average exercise price $2.49 $9.14 $7.58 $6.92
per share of options
outstanding
- -------------------------------------------------------------------------------------------------------------------------------
In October 1995 the Financial Accounting Standards Board issued FAS 123
"Accounting for Stock Based Compensation," ("FAS 123"), which establishes
financial accounting and reporting standards for stock based employee
compensation plans and for the issuance of equity instruments to acquire goods
and services from non-employees. In fiscal 1997, the Company adopted the
disclosure-only provisions of FAS 123. If the Company had elected to recognize
compensation costs based on the fair value at the date of grant for awards in
fiscal 1997 and 1996, consistent with the provisions of FAS 123, the Company's
net income (loss) and earnings (loss) per common share would have been reduced
to the following pro forma amounts:
- --------------------------------------------------------------------------------
Year Ended April 30 1997 1996
- --------------------------------------------------------------------------------
Income (Loss) from Continuing Operations:
As reported $725 $7,085
Pro forma ($1,110) $6,120
Primary Earnings (Loss) Per Share:
As reported $ 0.05 $ 0.47
Pro forma ($ 0.08) $ 0.41
The pro forma effect on net income for fiscal 1997 and 1996 may not be
representative of the pro forma effect on net income for future years because
the FAS 123 method of accounting for pro forma compensation expense has not been
applied to options granted prior to May 1, 1995. Fully diluted earnings per
share do not differ materially from primary earnings per share.
The weighted-average fair values at date of grant for options granted in
fiscal 1997 and 1996 were estimated using the Black-Scholes option-pricing
model, based on the following assumptions: (i) no expected dividend yields for
fiscal years 1997 and 1996; (ii) expected volatility rates of 47.1% for fiscal
1997 and 49.7% for fiscal 1996; and (iii) expected lives of 6 years for both
fiscal 1997 and fiscal 1996. The risk-free interest rate applied for both
fiscal 1997 and 1996 was 6.9%.
The following table rolls forward the stock option activity for the
following years ending April 30,:
--------------------------------------------------------------------------------------
1997 1996
Shares Weighted - Shares Weighted -
Average Average
Exercise Exercise
Price Price
- --------------------------------------------------------------------------------------
Outstanding - beginning of 1,498,825 $ 5.73 1,312,824 $ 4.34
year
Granted during the year: 622,195 $ 9.41 384,660 $ 8.96
Exercised during the year: 140,980 $ 3.80 182,374 $ 3.04
Forfeited during the year: 92,841 $ 9.31 16,285 $ 7.87
Outstanding, end of year 1,887,199 $ 6.92 1,498,825 $ 5.73
Exercisable, end of year 1,027,465 $ 5.52 1,105,425 $ 4.53
- --------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at April 30, 1997:
------------------------------------------------------------------------------
Range of Exercise Number Weighted- Weighted- Number Weighted -
Prices Outstanding Avg Average Exercisable at Average
at April 30, Remaining Exercise April 30, Exercise
1997 Contractual Price 1997 Price
Life
- -------------------------------------------------------------------------------------------------
$1.25 - $4.99 307,500 3.56 $ 2.43 258,700 $ 2.43
$5.00 - $7.99 661,525 6.05 $ 5.76 564,375 $ 5.82
$8.00 - $12.25 918,174 8.73 $ 9.08 204,390 $ 8.61
- -------------------------------------------------------------------------------------------------
Total: 1,887,199 7.02 $ 6.92 1,027,465 $5.52
- -------------------------------------------------------------------------------------------------
NOTE 12 - PREFERRED SHARE RIGHTS PURCHASE PLAN:
- --------------------------------------------------------------------------------
On June 7, 1990, the Board of Directors of the Company adopted a Preferred
Share Rights Purchase Plan under which a Preferred Share Purchase Right (a
"Right") is attached to each share of Company common stock. The Rights will
be exercisable only if a person or group acquires 20% or more of the Company's
common stock or announces a tender offer, the consummation of which would result
in ownership by a person or group of 20% or more of the common stock. Each
Right entitles stockholders to buy one one-hundredth of a share of Series B
Junior Participating Preferred Stock (the "Series B Preferred Shares") of the
Company at a price of $15. If the Company is acquired in a merger or other
business combination transaction, each Right will entitle its holder to purchase
a number of the acquiring company's common shares having a value equal to twice
the exercise price of the Right. If a person or group acquires 20% or more of
the Company's outstanding common stock, each Right will entitle its holder
(other than such person or members of such group) to receive, upon exercise, a
number of the Company's common shares having a value equal to two times the
exercise price of the Right. Following the acquisition by a person or group of
20% or more of the Company's common stock and prior to an acquisition of 50% or
more of such common stock, the Board of Directors may exchange each Right (other
than Rights owned by such person or group) for one share of common stock or for
one one-hundredth of a Series B Preferred Share. Prior to the acquisition by a
person or group of 20% of the Company's common stock, the Rights are redeemable,
at the option of the Board, for $.01 per Right. The Rights expire on June 17,
2000. The Rights do not have voting or dividend rights, and until they become
exercisable, have no dilutive effect on the earnings of the Company.
NOTE 13- COMMITMENTS AND CONTINGENCIES:
- --------------------------------------------------------------------------------
The Company rents certain facilities and equipment under agreements treated
for financial reporting purposes as operating leases. The majority of leases
currently in effect are renewable for periods of two to five years. Rent
expense under these leases was approximately $3,716,000, $4,041,000, and
$2,724,000 for the years ended April 30, 1997, 1996 and 1995, respectively.
Future minimum rents payable under operating leases for years ending April
30 are as follows:
Year Ending April 30,
1998 $ 3,626
1999 2,618
2000 2,454
2001 2,027
2002 1,568
Thereafter 4,682
---------
$16,975
---------
---------
The Ark licensing agreement includes an obligation for the Company to pay
significant additional consideration if and when certain future criteria are
achieved. The Company does not believe the criteria will be met in the next
year. Payment of this consideration will give the Company ownership of all
patents and legal rights related to the Ark product line.
The Company has been subject to product liability claims primarily through
its Spider subsidiary. To minimize the financial impact of product liability
risks and adverse judgments, product liability insurance has been purchased in
amounts and under terms considered acceptable to management.
At any point in time covered by these financial statements, there are
outstanding product liability claims against the Company, and incidents are
known to management which may result in future claims. Management, in
conjunction with defense counsel, periodically reviews the likelihood that such
product claims and incidents will result in adverse judgments, the estimated
amount of such judgments and costs of defense, and accrues liabilities as
appropriate.
Recoveries, if any, may be realized from indemnitors, codefendants,
insurers or insurance guaranty funds. Management, based on estimates provided
by the Company's legal counsel on such claims, believes its insurance coverage
is adequate.
Management estimates the range of the Company's future exposure amounts
relating to unresolved claims at April 30, 1997, aggregate from approximately $0
to $400,000 before recoveries and between $0 and $300,000 net of recoveries.
Included in Other Income (Expense), net, in the years ended April 30,
1997, 1996 and 1995 are settlements of approximately $161,000, $102,000, and
$32,000, respectively.
NOTE 14- FOREIGN OPERATIONS:
- --------------------------------------------------------------------------------
ADJUSTMENTS
UNITED OTHER &
STATES EUROPE ASIA FOREIGN ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
1997
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Customers (1) $103,721 $33,845 $17,231 $13,396 $ - $168,193
Inter-area (2) 17,711 - 2,293 (20,004) -
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 121,432 33,845 19,524 13,396 (20,004) 168,193
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before
Corporate Expenses 14,085 (1,215) 1,880 (1,925) 12,825
Corporate Expenses (7,979)
----------
Operating Income $4,846
-----------
Identifiable Assets $87,677 $20,698 $11,302 $13,789 $133,466
-----------
- ---------------------------------------------------------------------------------------------------------------------------
1996
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Customers (1) $85,810 $32,394 $13,598 $13,103 $ - $144,905
Inter-area (2) 13,284 - 897 - (14,181) -
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 99,094 32,394 14,495 13,103 (14,181) 144,905
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before
Corporate Expenses 15,223 1,556 320 (124) 16,975
Corporate Expenses (5,218)
------------
Operating Income $11,757
------------
Identifiable Assets $81,342 $20,563 $10,541 $14,047 $126,493
------------
- ---------------------------------------------------------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Customers (1) $79,406 $19,714 $5,396 $5,494 $ - $110,010
Inter-area (2) 8,347 - 1,094 - (9,441) -
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 87,753 19,714 6,490 5,494 (9,441) 110,010
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income Before
Corporate Expenses 15,413 366 481 30 16,290
Corporate Expenses (4,627)
-------------
Operating Income $11,663
-------------
Identifiable Assets $70,357 $16,316 $6,764 $12,047 $105,484
-------------
(1) U.S. sales to unaffiliated customers in foreign countries were $7,600,000,
$5,978,000 and $6,881,000 in fiscal 1997, 1996, and 1995, respectively.
(2) Inter-area sales to affiliates represent products which were transferred
between geographic areas at negotiated prices. These amounts have been
eliminated in the consolidation.
NOTE 15- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
- --------------------------------------------------------------------------------
Fiscal 1997 Quarters First Second Third Fourth Total
- -------------------- -------- -------- -------- -------- ----------
Revenue $40,929 $41,323 $39,661 $46,280 $168,193
Gross Profit 16,273 17,311 15,779 16,788 66,151
Net Income (Loss) 2,232 2,424 1,312 (5,243) 725
Earnings (Loss) Per share * .15 .16 .09 (.36) .05
Fiscal 1996 Quarters First Second Third Fourth Total
- -------------------- -------- -------- -------- -------- ----------
Revenue $33,013 $35,622 $35,641 $40,629 $144,905
Gross Profit 13,905 14,191 13,826 15,508 57,430
Net Income 2,060 1,806 1,151 2,068 7,085
Earnings Per Share* .14 .12 .08 .14 .47
Fiscal 1995 Quarters First Second Third Fourth Total
- -------------------- -------- -------- -------- -------- ----------
Revenue $24,509 $26,758 $27,187 $31,556 $110,010
Gross Profit 10,438 11,600 10,954 13,319 46,311
Net Income 1,649 2,162 1,616 2,301 7,728
Earnings Per Share .12 .15 .11 .15 .53
* The total of the four quarters does not equal the year due to rounding.
FLOW INTERNATIONAL CORPORATION
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Additions
------------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Classification of Period Expenses Accounts Deductions * of Period
- --------------- ------------ ----------- ------------ -------------- -----------
Year Ended April 30:
- ---------------------
Allowance for Doubtful Accounts
- -------------------------------
1997 $1,186 $704 $ (882) $1,008
1996 1,150 576 (540) 1,186
1995 908 480 (238) 1,150
Provision for Slow-Moving and Obsolete Inventory
- ------------------------------------------------
1997 $2,352 $83 $ (538) $1,897
1996 2,205 207 (60) 2,352
1995 2,093 324 (212) 2,205
- ------------
* Write-offs of uncollectible accounts and disposal of obsolete inventory.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------------------------
Information regarding directors and executive officers of the registrant is
incorporated herein by reference from the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------------------------------------------------------
Information regarding executive compensation is incorporated herein by
reference from the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------------------------
Information regarding certain relationships and related transactions is
incorporated herein by reference from the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements.
See Item 8 of Part II for a list of the Financial Statements filed as
part of this report.
2. Financial Statement Schedules.
See Item 8 of Part II for a list of the Financial Statement Schedules
filed as part of this report.
3. Exhibits. See subparagraph (c) below.
(b) Reports on Form 8-K -
None
(c) Exhibits.
EXHIBIT
NUMBER
3.1 Restated Certificate of Incorporation, filed with the state of Delaware
September 14, 1989. (Incorporated by reference to Exhibit 3.1 to the
registrant's Annual Report on Form 10-K for the year ended April 30,
1990.)
3.2 By-Laws of Flow International Corporation. (Incorporated by reference
to Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the
year ended April 30, 1990.)
4.1 Certificate of Designation of Series B Junior Participating Preferred
Stock. (Incorporated by reference to Exhibit 4.5 to the registrant's
Annual Report on Form 10-K for the year ended April 30, 1990.)
4.2 Rights Agreement dated as of June 7, 1990, between Flow International
Corporation and First Interstate Bank, Ltd. (Incorporated by reference
to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated
June 8, 1990.)
10.1 Flow International Corporation 1984 Restated Stock Option Plan, as
amended. (Incorporated by reference to Exhibit 10.1 to the
registrant's Annual Report on Form 10-K for the year ended April 30,
1990.)
10.2 Flow International Corporation 1987 Stock Option Plan for Nonemployee
Directors, as amended. (Incorporated by reference to Exhibit 10.5 to
the registrant's Annual Report on Form 10-K for the year ended April
30, 1994.)
10.3 Flow International Corporation 1991 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.6 to the registrant's Annual
Report on Form 10-K for the year ended April 30, 1994.)
10.4 Flow International Corporation 1995 Long-Term Incentive Plan.
(Incorporated by reference to Exhibit 10.4 to the registrant's Annual
Report on Form 10-K for the year ended April 30, 1995.)
10.5 Flow International Corporation Employee Stock Ownership Plan and
TrustgAreement, as amended and restated effective January 1, 1994,
and certain later dates, between Flow International Corporation and
Seattle -First National Bank, as trustee. (Incorporated by
reference to Exhibit 10.7 to the registrant's Annual Report on Form
10-K for the year ended April 30, 1994).
10.6 Stock Purchase Agreement dated as of September 26, 1989, between Flow
International Corporation Employee Stock Ownership Plan and Trust and
Seattle-First National Bank. (Incorporated by reference to Exhibit
10.7 to the registrant's Annual Report on Form 10-K for the year ended
April 30, 1990.)
10.7 ESOT Loan and Guaranty Agreement dated September 26, 1989, among U.S.
Bank of Washington, N.A., Flow International Corporation Employee
Stock Ownership Plan and Trust and Flow International Corporation.
(Incorporated by reference to Exhibit 10.8 to the registrant's Annual
Report on Form 10-K for the year ended April 30, 1990).
10.8 Replacement ESOT Note dated September 1992. (Incorporated by
reference to Exhibit 10.10 to the registrant's Annual Report on Form
10-K for the year ended April 30, 1993).
10.9 Pledge Agreement dated September 26, 1989, among U.S. Bank of
Washington, N.A., Flow International Corporation. Employee Stock
Ownership Plan and Trust and Flow International Corporation.
(Incorporated by reference to Exhibit 10.10 to the registrant's Annual
Report on Form 10-K for the year ended April 30, 1990.)
10.10 Unconditional Guaranty dated September 26, 1989, by Flow International
Corporation for the benefit of U.S. Bank of Washington, N.A.
(Incorporated by reference to Exhibit 10.11 to the registrant's Annual
Report on Form 10-K for the year ended April 30, 1990.)
10.11 Flow International Corporation Voluntary Pension and Salary Deferral
Plan and Trust Agreement, as restated effective January 1, 1992.
(Incorporated by reference to Exhibit 10.13 to the registrant's Annual
Report on Form 10-K for the year ended April 30, 1993).
10.12 Amendment to Flow International Corporation Voluntary Pension and
Salary Deferral Plan. (Incorporated by reference to Exhibit 10.13
to the registrant's Annual Report on Form 10-K for the year ended
April 30, 1994).
10.13 Lease dated September 24, 1991, between Flow International and
Birtcher LP/LC Partnership, together with Addendum to Lease.
(Incorporated by reference to Exhibit 10.25 to the registrant's
Annual Report on Form 10-K for the year ended April 30, 1992.)
10.14 Credit agreement amount Flow International Corporation, as borrower,
the Lenders listed herein, as lenders, and US Bank of Washington, N.A.
as agent for lenders dated September 25, 1995. (Incorporated by
reference to Exhibit 10.1 to the registrant's Quarterly Report on Form
10-Q for the period ended October 31, 1995.)
10.15 Letter agreement dated April 25, 1997 between Flow International
Corporation and U.S. Bank of Washington, N.A.
10.16 Note purchase agreement dated September 1, 1995. (Incorporated by
reference to Exhibit 10.2 to the registrant's Quarterly Report on Form
10-Q for the period ended October 31, 1995.)
10.17 First amendment to Note Purchase Agreement dated July 16, 1997.
10.18 Form of Change in Control Agreement. (Incorporated by reference to
Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the
year ended April 30, 1996.)
21.1 Subsidiaries of the Registrant. (Incorporated by reference to Exhibit
21.1 to the registrant's Annual Report on Form 10-K for the year ended
April 30, 1996.)
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
July 22, 1997
/s/ Ronald W. Tarrant
---------------------------------
Ronald W. Tarrant
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on the behalf of the
registrant and in the capacities on this 22th day of July, 1997
Signature Title
------------- ------------
/s/ Ronald W. Tarrant Chairman, President, Chief Executive Officer
- ---------------------------- (Principal Executive Officer)
Ronald W. Tarrant
/s/ Stephen D. Reichenbach Executive Vice President,
- ---------------------------- Chief Financial Officer
Stephen D. Reichenbach (Principal Financial Officer & Principal
Accounting Officer)
/s/ Ronald D. Barbaro Director
- ---------------------------
Ronald D. Barbaro
/s/ Daniel J. Evans Director
- ---------------------------
Daniel J. Evans
/s/ Kathryn L. Munro Director
- ---------------------------
Kathryn L. Munro
Signature Title
--------------- ----------
/s/ Arlen I. Prentice Director
- ---------------------------
Arlen I. Prentice
/s/ J. Michael Ribaudo Director
- ---------------------------
J. Michael Ribaudo
/s/ Kenneth M. Roberts Director
- ---------------------------
Kenneth M. Roberts
/s/ Sandra F. Rorem Director
- ---------------------------
Sandra F. Rorem
/s/ Dean D. Thornton Director
- ---------------------------
Dean D. Thornton