FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
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
(253) 850-3500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
The number of shares outstanding of common stock, as of September 3, 1998:
14,949,156 shares
FLOW INTERNATIONAL CORPORATION
INDEX
Page
-----
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets -
July 31, 1998 and April 30, 1998 . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations -
Three Months Ended July 31, 1998 and 1997. . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended July 31, 1998 and 1997. . . . . . . . . . . 5
Consolidated Statements of Comprehensive Operations -
Three Months Ended July 31, 1998 and 1997. . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 8
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote
of Security Holders. . . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
July 31, April 30,
1998 1998
----------- --------
(unaudited)
ASSETS
Current Assets:
Cash $ 1,550 $ 3,006
Trade Accounts Receivable, less allowances
for doubtful accounts of $632 and $699, respectively 38,572 37,359
Inventories 39,802 36,976
Deferred Income Taxes 2,493 2,493
Other Current Assets 6,654 7,846
-------- --------
Total Current Assets 89,071 87,680
Property and Equipment, net 12,428 11,992
Intangible Assets, net of accumulated
amortization of $5,879 and $5,546, respectively 16,228 16,561
Deferred Income Taxes 1,562 1,562
Other Assets 2,567 3,386
-------- --------
$121,856 $121,181
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable $ 1,010 $ 1,450
Current Portion of Long-Term Obligations 5,418 5,455
Accounts Payable 10,165 11,338
Accrued Payroll and Related Liabilities 3,517 5,428
Other Accrued Taxes 435 374
Other Accrued Liabilities 3,620 3,772
-------- --------
Total Current Liabilities 24,165 27,817
Long-Term Obligations 35,209 32,076
Minority Interest 68 93
Shareholders' Equity:
Series A 8% Convertible Preferred Stock -
$.01 par value, $500 liquidation preference, 1,000,000 shares
authorized, 0 issued
Common Stock - $.01 par value, 20,000,000 shares authorized
15,329,706 and 14,948,889 shares issued and outstanding,
respectively, at July 31, 1998
15,227,725 and 14,846,908 shares issued and outstanding,
respectively, at April 30, 1998 153 152
Capital in Excess of Par 41,742 41,030
Retained Earnings 25,865 24,069
Treasury Common Stock of 380,817 shares at cost (1,429) (1,429)
Cumulative Translation Adjustment (3,212) (2,286)
Unrealized Loss on Equity Securities Available For Sale (705) (341)
-------- --------
Total Stockholders' Equity 62,414 61,195
-------- --------
$121,856 $121,181
-------- --------
-------- --------
See Accompanying Notes to Condensed
Consolidated Financial Statements
3
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
Three Months Ended
July 31,
---------------------
1998 1997
Revenue:
Sales $36,422 $37,446
Services 6,423
Rentals 3,645
------- -------
Total Revenues 36,422 47,514
Cost of Sales:
Sales 20,587 22,468
Services 5,887
Rentals 1,099
------- -------
Total Cost of Sales 20,587 29,454
------- -------
Gross Profit 15,835 18,060
Expenses:
Marketing 5,734 6,895
Research and Engineering 3,059 2,500
General and Administrative 3,721 4,160
Restructuring 4,910
------- -------
12,514 18,465
------- -------
Operating Income (Loss) 3,321 (405)
Interest and Other Expense, net (718) (1,055)
------- -------
Income (Loss) Before Provision for Income Taxes 2,603 (1,460)
Provision (Benefit) for Income Taxes 807 (511)
------- -------
Net Income (Loss) $ 1,796 $ (949)
------- -------
------- -------
Basic Earnings (Loss) Per Share $ .12 $ (.07)
------- -------
------- -------
Diluted Earnings (Loss) Per Share $ .12 $ (.07)
------- -------
------- -------
See Accompanying Notes to Condensed
Consolidated Financial Statements
4
FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Three Months Ended
July 31,
---------------------
1998 1997
Cash Flows from Operating Activities:
Net Income (Loss) $ 1,796 $ (949)
Adjustments to Reconcile Net Income (Loss) to Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 1,074 1,186
Restructuring provision 4,910
Increase in assets (2,392) (2,434)
Decrease in liabilities, net of restructuring (3,200) (244)
------- -------
Cash (used) provided by operating activities (2,722) 2,469
------- -------
Cash Flows from Investing Activities:
Expenditures for property and equipment (1,381) (2,922)
Payment for business combination, net of cash acquired (2,528)
Other 204 135
------- -------
Cash used by investing activities (1,177) (5,315)
------- -------
Cash Flows from Financing Activities:
Borrowings under line of credit agreements, net 4,418 10,345
Payments of long-term debt (1,762) (12)
Proceeds from issuance of common stock 713 143
------- -------
Cash provided by financing activities 3,369 10,476
------- -------
Effect of exchange rate changes (926) (2,285)
------- -------
(Decrease) increase in cash and cash equivalents (1,456) 5,345
Cash and cash equivalents at beginning of period 3,006 2,479
------- -------
Cash and cash equivalents at end of period $ 1,550 $ 7,824
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Fair value of assets acquired $4,735
Cash paid and stock issued for assets acquired (2,818)
-------
Liabilities assumed $1,917
See Accompanying Notes to Condensed
Consolidated Financial Statements
5
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(unaudited, in thousands)
Three Months Ended
July 31,
---------------------
1998 1997
Net Income (Loss) $1,796 $ (949)
Other Comprehensive Income, net of tax:
Unrealized Loss on Equity Securities Available for Sale (251) (1,485)
Cumulative Translation Adjustment (639) (88)
------ -------
Comprehensive Income (Loss) $ 906 $(2,522)
------ -------
------ -------
See Accompanying Notes to Condensed
Consolidated Financial Statements
6
FLOW INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended July 31, 1998
(unaudited)
1. In the opinion of the management of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
the financial position, statements of operations, cash flows and
comprehensive operations for the interim periods presented. These interim
financial statements should be read in conjunction with the April 30, 1998
consolidated financial statements.
2. Basic earnings per share represents net income available to common
stockholders divided by the weighted average number of shares outstanding
during the period. Diluted earnings per share represents net income
available to common stockholders divided by the weighted average number of
shares outstanding including the potentially dilutive impact of stock
options, where appropriate.
Basic shares outstanding for the three months ended July 31, 1998 and 1997
were 14,898,000 and 14,560,000, respectively. Diluted shares outstanding
for the three months ended July 31, 1998 and 1997 were 15,347,000 and
14,560,000, respectively.
3. Inventories consist of the following:
(in thousands)
July 31, 1998 April 30, 1998
------------- --------------
Raw Materials and Parts $22,614 $21,090
Work in Process 9,795 9,312
Finished Goods 7,393 6,574
------- -------
$39,802 $36,976
7
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1997
THE RESULTS OF OPERATIONS FOR THE FIRST QUARTER OF FISCAL 1999 FOR FLOW
INTERNATIONAL CORPORATION ("FLOW" OR THE "COMPANY") INCLUDE ONLY THE CORE
ULTRAHIGH-PRESSURE ("UHP") OPERATIONS, WHILE THE PRIOR YEAR QUARTER INCLUDES THE
ACCESS AND SERVICES OPERATIONS IN ADDITION TO THE UHP OPERATIONS. The Access
and Services operations were sold during the second quarter of fiscal 1998.
Associated with this sale, the Company recorded a $4.9 million restructuring
provision during the first quarter of fiscal 1998 to write down the assets sold
to net realizable value as well as provide for probable future obligations
associated with the sale. This charge is included as a separate component of
operating expenses in the accompanying Consolidated Statements of Operations.
Given this significant disposition of operations during fiscal year 1998,
two separate Results of Operations reviews have been provided. The "UHP RESULTS
OF OPERATIONS ANALYSIS" provides a review of the UHP operations for the three
month period ended July 31, 1998 and 1997 and the "ACCESS AND SERVICES
OPERATIONS ANALYSIS" reviews the results of operations for Access and Services
for the three month period ended July 31, 1998 and 1997.
The following pro forma table separates the Company's Consolidated
Statement of Operations into the ongoing operations (UHP) and the divested
operations (Access and Services). The Access and Services results include the
restructuring charge:
(In thousands) Quarter Ended July 31, 1998 Quarter Ended July 31, 1997
------------------------------------- ----------------------------------
Access & Access &
UHP Services Consolidated UHP Services Consolidated
------- -------- ------------- ------- -------- ------------
Revenue $36,422 $ $36,422 $30,664 $16,850 $47,514
Gross profit 15,835 15,835 12,813 5,247 18,060
Operating expenses 12,514 12,514 10,038 8,427 18,465
Operating income (loss) 3,321 3,321 2,775 (3,180) (405)
Interest and other exp., net (718) (718) (678) (377) (1,055)
Pre-tax income (loss) 2,603 2,603 2,097 (3,557) (1,460)
8
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
UHP RESULTS OF OPERATIONS ANALYSIS -
The following analysis presents a quarter over quarter comparison of the
UHP operations. The following pro forma table presents the results of
operations of the Company's UHP business only and excludes the divested
business units:
Pro-forma, in thousands
Three months ended
July 31,
---------------------
1998 1997
------- -------
Revenue $36,422 $30,664
Gross Profit 15,835 12,813
Operating Expenses:
Marketing 5,734 4,875
Research & Engineering 3,059 2,237
General & Administrative 3,721 2,926
------- -------
Total Operating Expenses 12,514 10,038
Operating Income 3,321 2,775
Interest/other exp., net (718) (678)
------- -------
Pre-tax income $ 2,603 $ 2,097
Revenue for the three months ended July 31, 1998 was $36.4 million, an
increase of $5.8 million (19%) as compared to the prior year of $30.7 million.
Geographically, revenue from North America and Europe increased 23% and 18%,
respectively, compared to the prior year. Revenue from Asia decreased 3% as
compared to the prior year; however, excluding the effects of exchange rate
changes between periods, sales in Asia increased 12% over the prior year. Asia
represented 10% of fiscal 1999 revenues as compared to 12% of revenues in the
first quarter of fiscal 1998. The Company's revenue can be segregated into two
primary groups, systems and consumables. In general, a system is comprised of a
pump along with the robotics or articulation to move the cutting or cleaning
head and may also include automation capabilities. Consumables represent parts
used by the UHP systems during operation. Systems and consumables revenues of
$23.3 million and $13.1 million increased 23% and 12% for the quarter,
respectively over the prior year periods.
Gross profit expressed as a percentage of revenues (gross margin rate)
was 43% as compared to 42% in the prior year quarter. In general, UHP
systems sales have gross margin rates less than 40% and consumable parts
sales have margins in excess of 50%. As such, the gross margin rate can vary
depending on the revenue mix between the various types of systems and
consumable sales. The gross margin rate increased even
9
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
with a continued shift in revenue mix towards lower margin system business.
This gross margin improvement reflects the benefit of lower costs on the
standard system product line as a result of increased production and
productivity enhancements.
Operating expenses of $12.5 million increased $2.5 million (25%) for the
quarter ended July 31, 1998, compared to the prior year. Marketing expenses
increased $859,000 (18%) to $5.7 million as compared to the prior year period.
Expressed as a percentage of revenue however, marketing expenses remained
comparable at 16% versus the prior year. Research and engineering expense
increased $822,000 (37%) to $3.1 million for the quarter. As a percent of
revenue, research and engineering expenses were 8%, an increase from 7% in the
prior year. This reflects the Company's continued aggressive pursuit of
technological advances through increased research and engineering spending. The
effect of this increase from 7% to 8% of revenues, represents an additional
$400,000 in quarterly expenses, roughly $.02 per diluted share. General &
administrative expense of $3.7 million increased $795,000 (27%) for the quarter
as compared to the prior year period. However, general and administrative
expenses expressed as a percent of revenue were the same in both the current and
prior year quarter. Total operating expenses expressed as a percent of revenue
were 34% for the current quarter, as compared to 33% in the prior year quarter.
Operating income for the quarter ended July 31, 1998 was $3.3 million, an
increase of $546,000 (20%) over the prior year quarter.
First quarter fiscal 1999 interest and other expense, net of $718,000
represents an increase of $40,000 (6%) versus the prior year. Included in this
net amount is $763,000 of interest expense which was comparable to the prior
year.
Based upon the expected tax position of the Company for fiscal 1999, taxes
have been provided for at 31% of pre-tax income. First quarter fiscal 1998
taxes were provided for at 35% of pre-tax income; however, the net tax rate for
the twelve months in fiscal 1998 was 29%. This decrease in tax rates within
fiscal 1998, reflects changes between first quarter fiscal 1998 projected, and
year end actual pre-tax income in various taxing jurisdictions. The increased
rate of 31% in fiscal 1999 as compared to the net twelve month fiscal 1998 rate
of 29% is reflective of the projected change in mix of pre-tax income to higher
taxing jurisdictions. The income tax rate was lower than the statutory rate in
both the current and prior year due primarily to lower foreign tax rates,
benefits from the foreign sales corporation, and an ongoing review of the
Company's FAS 109 valuation allowance.
10
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Basic shares outstanding for the three months ended July 31, 1998 and 1997
were 14,898,000 and 14,560,000, respectively. Diluted shares outstanding for
the three months ended July 31, 1998 and 1997 were 15,347,000 and 14,895,000,
respectively.
The Company recorded net income of $1.8 million, or $.12 per Basic and
Diluted share for the three months ended July 31, 1998, compared to $1.4
million, or $.09 per Basic and Diluted share for the same prior year period.
ACCESS AND SERVICES OPERATIONS ANALYSIS -
The Access and Services operations were sold during fiscal 1998 and thus
did not have any activity during the first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $2.7 million in cash from operations during the three
months ended July 31, 1998 as compared to cash generated by operating activities
of $2.5 million in the prior year. The use of cash is related to the growth in
inventory, as well as a reduction in trade and other liabilities. Total debt at
July 31, 1998 was $41.6 million, up $2.7 million from April 30, 1998. The
Company believes that the available credit facilities and working capital
generated by operations, will provide sufficient resources to meet its operating
and capital requirements. The Company's Credit Agreement and Private Placement
require the Company to comply with certain financial covenants. As of July 31,
1998, the Company was in compliance with all such covenants.
Gross trade receivables at July 31, 1998 increased $1.1 million (3%), from
April 30, 1998. This increase is a function of a shift in revenue mix towards
large system sales, as well as several large billings late in the quarter on
percentage of completion projects. Days sales in gross accounts receivable can
be negatively impacted by the traditionally longer payment cycle outside the
United States as well as that 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.
11
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Inventories at July 31, 1998 increased $2.8 million (8%) from April 30,
1998. This increase is in both parts and finished goods. The increase reflects
the continued increasing demand for the Company's products, as well as new
product inventory. Certain products manufactured by Flow Robotics and Flow
Automation can require an extended manufacturing period and thus impact
inventory levels from period to period.
The Company is currently converting its existing computer applications to
help ensure readiness for the potential impact of the year 2000 date.
Additionally, the Company is interviewing key suppliers and customers to ensure
readiness on their part. Management currently estimates the project will be
completed in early calendar 1999 and the associated costs will be less than
$150,000.
SAFE HARBOR STATEMENT:
STATEMENTS IN THIS REPORT THAT ARE NOT STRICTLY HISTORICAL ARE "FORWARD-LOOKING"
STATEMENTS WHICH SHOULD BE CONSIDERED AS SUBJECT TO THE MANY UNCERTAINTIES THAT
EXIST IN THE COMPANY'S OPERATIONS AND BUSINESS ENVIRONMENT. THESE
UNCERTAINTIES, WHICH INCLUDE ECONOMIC AND CURRENCY CONDITIONS, MARKET DEMAND AND
PRICING, COMPETITIVE AND COST FACTORS, AND THE LIKE, ARE SET FORTH IN THE FLOW
INTERNATIONAL CORPORATION FORM 10-K REPORT FOR 1998 FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
12
FLOW INTERNATIONAL CORPORATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is party to various legal actions incident to the normal
operations of its business, none of which is believed to be material to the
financial condition of the Company.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
13
FLOW INTERNATIONAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOW INTERNATIONAL CORPORATION
Date: September 11, 1998 /s/ Ronald W. Tarrant
--------------------------------------
Ronald W. Tarrant
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: September 11, 1998 /s/ Stephen D. Reichenbach
--------------------------------------
Stephen D. Reichenbach
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
14