SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
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
WASHINGTON 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 March 9, 1999:
14,641,586 shares.
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FLOW INTERNATIONAL CORPORATION
INDEX
PAGE
----
Part I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets -
January 31, 1999 and April 30, 1998.............................. 3
Condensed Consolidated Statements of Income -
Three Months Ended January 31, 1999 and 1998..................... 4
Condensed Consolidated Statements of Income -
Nine Months Ended January 31, 1999 and 1998...................... 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended January 31, 1999 and 1998...................... 6
Consolidated Statements of Comprehensive Income -
Three and Nine Months Ended January 31, 1999 and 1998............ 7
Notes to Condensed Consolidated Financial Statements............... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 17
Item 2. Changes in Securities......................................... 17
Item 3. Defaults Upon Senior Securities............................... 17
Item 4. Submission of Matters to a Vote
of Security Holders....................................... 17
Item 5. Other Information............................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................. 17
Signatures................................................................. 18
-2-
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
January 31, April 30,
1999 1998
----------- ---------
(unaudited)
ASSETS
Current Assets:
Cash $ 3,709 $ 3,006
Trade Accounts Receivable, less allowances
for doubtful accounts of $745 and $699, respectively 39,338 37,359
Inventories 39,060 36,976
Deferred Income Taxes 2,493 2,493
Other Current Assets 5,907 7,846
--------- ---------
Total Current Assets 90,507 87,680
Property and Equipment, net 15,593 11,992
Intangible Assets, net of accumulated
amortization of $6,545 and $5,546, respectively 15,562 16,561
Deferred Income Taxes 1,562 1,562
Other Assets 3,090 3,386
--------- ---------
$126,314 $121,181
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable $ 1,013 $ 1,450
Current Portion of Long-Term Obligations 4,331 5,455
Accounts Payable 7,583 11,338
Accrued Payroll and Related Liabilities 3,425 5,428
Other Accrued Taxes 510 374
Other Accrued Liabilities 5,389 3,772
--------- ---------
Total Current Liabilities 22,251 27,817
Long-Term Obligations 40,710 32,076
Minority Interest 84 93
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,
14,641,586 shares outstanding at January 31, 1999
14,846,908 shares outstanding at April 30, 1998 146 148
Capital in Excess of Par 39,944 39,925
Retained Earnings 26,743 23,749
Cumulative Translation Adjustment (2,814) (2,286)
Unrealized Loss on Equity Securities Available For Sale (750) (341)
--------- ---------
Total Stockholders' Equity 63,269 61,195
--------- ---------
$126,314 $121,181
--------- ---------
--------- ---------
See Accompanying Notes to Condensed
Consolidated Financial Statements
-3-
FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in thousands, except per share data)
Three Months Ended
January 31,
-------------------------
1999 1998
---- ----
Revenue $ 33,554 $ 34,463
Cost of Sales 17,969 19,996
-------- --------
Gross Profit 15,585 14,467
Expenses:
Marketing 5,885 5,175
Research and Engineering 3,131 2,613
General and Administrative 3,535 3,342
-------- --------
12,551 11,130
-------- --------
Operating Income 3,034 3,337
Interest and Other Expense, net (1,029) (553)
-------- --------
Income Before Provision for Income Taxes 2,005 2,784
Provision for Income Taxes 562 974
-------- --------
Net Income $ 1,443 $ 1,810
-------- --------
-------- --------
Basic Earnings Per Share $ .10 $ .12
-------- --------
-------- --------
Diluted Earnings Per Share $ .10 $ .12
-------- --------
-------- --------
See Accompanying Notes to Condensed
Consolidated Financial Statements
-4-
FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in thousands, except per share data)
Nine Months Ended
January 31,
-------------------------
1999 1998*
---- ----
Revenue:
Sales $108,359 $107,071
Services 6,423
Rentals 3,645
-------- --------
Total Revenue 108,359 117,139
Cost of Sales:
Sales 60,011 62,940
Services 5,887
Rentals 1,099
-------- --------
Total Cost of Sales 60,011 69,926
-------- --------
Gross Profit 48,348 47,213
Expenses:
Marketing 17,873 17,397
Research and Engineering 9,153 7,263
General and Administrative 11,011 10,922
Restructuring (Note 3) 4,910
-------- --------
38,037 40,492
-------- --------
Operating Income 10,311 6,721
Interest and Other Expense, net (2,694) (2,622)
-------- --------
Income Before Provision for Income Taxes 7,617 4,099
Provision for Income Taxes 2,189 1,434
-------- --------
Net Income $ 5,428 $ 2,665
-------- --------
-------- --------
Basic Earnings Per Share $ .37 $ .18
-------- --------
-------- --------
Diluted Earnings Per Share $ .36 $ .18
-------- --------
-------- --------
* See Note 3 which describes the disposition of certain business units during
fiscal 1998
See Accompanying Notes to Condensed
Consolidated Financial Statements
-5-
FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
Nine Months Ended
January 31,
-------------------------
1999 1998*
---- ----
Cash Flows from Operating Activities:
Net Income $ 5,428 $ 2,665
Adjustments to Reconcile Net Income to Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 3,402 3,212
Restructuring Provision 4,910
Other 114
Increase in assets, net of disposition (2,237) (9,005)
Decrease in liabilities, net of disposition (4,014) (882)
-------- --------
Cash provided by operating activities 2,693 900
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment (6,118) (4,566)
Payment for business combination, net of cash acquired (2,528)
Other (147)
-------- --------
Cash used by investing activities (6,118) (7,241)
-------- --------
Cash Flows from Financing Activities:
Borrowings under line of credit agreements, net 9,807 10,070
Payments of long-term debt (2,734) (1,286)
Proceeds from issuance of common stock 850 1,627
Purchase of Flow common stock (3,267) -
-------- --------
Cash provided by financing activities 4,656 10,411
-------- --------
Effect of exchange rate changes (528) (3,224)
-------- --------
Increase in cash and cash equivalents 703 846
Cash and cash equivalents at beginning of period 3,006 2,479
-------- --------
Cash and cash equivalents at end of period $ 3,709 $ 3,325
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Fair value of assets acquired $ 4,735
Cash paid for assets acquired (2,818)
Liabilities assumed $1,917
* See Note 3 which describes the disposition of certain business units during
fiscal 1998
See Accompanying Notes to Condensed
Consolidated Financial Statements
-6-
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
Three Months Ended
January 31,
--------------------
1999 1998
---- ----
Net Income $ 1,443 $ 1,810
Other Comprehensive Income:
Unrealized Loss on Equity Securities Available for Sale 105 (270)
Cumulative Translation Adjustment (793) (1,041)
------- -------
Comprehensive Income $ 755 $ 499
------- -------
------- -------
Nine Months Ended
January 31,
--------------------
1999 1998
---- ----
Net Income $ 5,428 $ 2,665
Other Comprehensive Income:
Unrealized Loss on Equity Securities Available for Sale (409) (470)
Cumulative Translation Adjustment (528) (2,329)
------- -------
Comprehensive Income (Loss) $ 4,491 $ (134)
------- -------
------- -------
See Accompanying Notes to Condensed
Consolidated Financial Statements
-7-
FLOW INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 1999
(unaudited)
1. In the opinion of the management of Flow International Corporation (the
"Company"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position,
statements of 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 January 31, 1999
and 1998 were 14,623,000 and 14,784,000, respectively. For the nine
months ended January 31, 1999 and 1998, basic shares outstanding were
14,757,000 and 14,671,000, respectively. Diluted shares outstanding for
the three months ended January 31, 1999 and 1998 were 14,957,000 and
15,133,000, respectively. The diluted shares outstanding include
potential dilutive common shares from employee stock options of 334,000
and 349,000 for the three months ended January 31, 1999 and 1998,
respectively. For the nine months ended January 31, 1999 and 1998,
diluted shares outstanding were 15,110,000 and 15,003,000,
respectively. The diluted shares outstanding include potential dilutive
common shares from employee stock options of 353,000 and 332,000 for
the nine months ended January 31, 1999 and 1998, respectively.
3. Included in the nine month period ended January 31, 1998 are the
results of operations of the Access and Services businesses. The
Company sold the assets and certain liabilities of these operations in
September 1997. Associated with the sale, the Company recorded a $4.9
million charge 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
Condensed Consolidated Statements of Income. The Company is party to
certain legal actions related to the divested operations, none of which
is believed to be material to the financial condition of the Company.
At April 30, 1998 the Company had $860,000 in asset valuation guarantee
reserves related to the sale. At January 31, 1999 the reserve had been
reduced to $283,000. During the nine months ended January 31, 1999 the
Company utilized the reserve for $577,000 with no other adjustments to
the reserve during this period. During the nine month period ended
January 31, 1998 the $860,000 reserve was created and remained at
$860,000 on January 31, 1998.
-8-
FLOW INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 1999
(unaudited)
4. During the second quarter of fiscal 1999 the Company purchased 336,000
shares of its common stock for $3.3 million. Additionally during the
second quarter, the Company's shareholders approved the change in the
state of incorporation from Delaware to Washington. Treasury Stock is
not recognized under Washington state and accordingly, Common Stock,
Capital in Excess of Par and Retained Earnings have been reduced to
reflect the retirement of the Treasury Stock.
5. Inventories consist of the following:
(in thousands)
JANUARY 31, 1999 APRIL 30, 1998
---------------- --------------
Raw Materials and Parts $ 22,433 $ 21,090
Work in Process 8,816 9,312
Finished Goods 7,811 6,574
--------- ---------
$ 39,060 $ 36,976
6. In June 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
("FAS 133"), was issued. This pronouncement standardizes the accounting
for derivative instruments by requiring that an entity recognize those
items as assets or liabilities in the financial statements and measure
them at fair value. FAS 133 is required to be adopted by the Company
for the year ended April 30, 2001. Early adoption is permitted. The
Company is currently reviewing the requirements of FAS 133 and
assessing its impact on the Company's financial statements. The Company
has not made a decision regarding the period of adoption.
-9-
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following pro forma table separates Flow International
Corporation's ("Flow" or the "Company"), Consolidated Statements of Income
for the nine months ended January 31, 1999 and 1998 into the ongoing
ultrahigh-pressure ("UHP") operations and the divested operations ("Access and
Services"). The non-core Access and Services operations, which were sold in
September 1997, are included in the financial results for the nine months ended
January 31, 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 Condensed Consolidated
Statements of Income. The three month periods ended January 31, 1999 and 1998 as
presented on the Condensed Consolidated Statements of Income include only the
UHP operations. The Access and Services results include the restructuring
charge:
(In thousands) Nine Months Ended January 31,
------------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
Access & Access &
UHP Services Consolidated UHP Services Consolidated
--------- -------- ------------ --- -------- ------------
Revenue .............................. $ 108,359 $ 108,359 $ 100,289 $ 16,850 $ 117,139
Gross profit ......................... 48,348 48,348 41,966 5,247 47,213
Operating expenses:
Marketing ......................... 17,873 17,873 15,377 2,020 17,397
Research and engineering .......... 9,153 9,153 7,000 263 7,263
General and administrative ........ 11,011 11,011 9,688 1,234 10,922
Restructuring ..................... 4,910 4,910
--------- --------- --------- --------- --------- ---------
Total operating expenses ............. 38,037 38,037 32,065 8,427 40,492
Operating income (loss) .............. 10,311 10,311 9,901 (3,180) 6,721
Interest and other exp., net ......... (2,694) (2,694) (2,245) (377) (2,622)
Pre-tax income (loss) ................ $ 7,617 $ 7,617 $ 7,656 $(3,557) $ 4,099
Given the disposition of Access and Services, two Results of Operations
reviews have been provided. The "UHP RESULTS OF OPERATIONS ANALYSIS" provides a
review of the on-going UHP operations for the three and nine month periods ended
January 31, 1999 and 1998 and the "ACCESS AND SERVICES OPERATIONS ANALYSIS"
reviews the results of operations for Access and Services for the nine month
periods ended January 31, 1999 and 1998.
-10-
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
UHP RESULTS OF OPERATIONS ANALYSIS--
Revenues for the nine month period ended January 31, 1999 increased
$8.1 million (8%) to $108.4 million as compared to $100.3 million in the prior
year. For the three months ended January 31, 1999 revenues were $33.6 million, a
decrease of $909,000 (3%) as compared to the prior year quarter of $34.5
million. For the nine months ended January 31, 1999, domestic and European
revenues increased 16% and 19%, respectively, and represented 54% and 27% of
total revenues, respectively, as compared to the prior year period. Asian
revenues decreased 14% for the nine months ended January 31, 1999 as compared to
the like period in the prior year and represented 10% of year to date fiscal
1999 revenues. During the three months ended January 31, 1999, revenue grew $1.4
million (17%) in Europe. This increase in Europe however was offset by reduced
revenues from the continued weakness in Asia of $1 million (21%) and a decrease
of over $2.5 million from large aerospace and automotive system orders in North
America, as compared to the prior year third quarter. Domestic revenue for the
three months ended January 31, 1999 was flat compared to the prior year. The
Company's revenues can be segregated into systems sales and consumables sales.
In general a system sale is comprised of a pump along with the robotics or
articulation to move the cutting head. Consumables represent parts used during
the operation. Systems revenues for the nine months ended January 31, 1999 were
$68.1 million, an increase of $1.1 million (2%) compared to the prior year
period. For the three months ended January 31, 1999, systems revenues decreased
$3.2 million (14%) to $20.4 million as compared to the prior year period.
Consumables revenues were $40.3 million for the nine months ended January 31,
1999 and $13.1 million for the three months ended January 31, 1999. This
represents a 21% increase for both periods versus the prior year. There have not
been any significant price increases for the Company's products.
The Company has also delivered two Fresher Under Pressure-TM-
technology systems and is producing several other systems for near-term
delivery. The Fresher Under Pressure technology utilizes UHP to destroy food
borne pathogens as well as extend product shelf life. The delivery of these
systems has not resulted in revenue recognition however, as this technology will
be leased rather than sold. These leases have a fixed monthly charge plus a per
gallon or per pound usage fee. The Company anticipates revenues to begin in
fiscal 2000.
Gross profit for the three months ended January 31, 1999 was $15.6
million, an increase of $1.1 million (8%) over the prior year period. This
increase was achieved in spite of a 3% decrease in revenues. Gross profit was
$48.3 million for the nine months
-11-
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
ended January 31, 1999, an increase of 6.4 million (15%) versus the like period
last year. Gross profit expressed as a percentage of revenues (gross margin
rate) was 46% and 45% for the three and nine months ended January 31, 1999,
respectively, as compared to 42% in both prior year periods. Comparison of gross
margin rates is dependent on the mix of revenue types, which include special
system, standard system and consumables sales. Systems typically carry lower
gross margin rates than the Company's consumable parts. Additionally, special
systems are generally custom designed and carry lower margins than the Company's
standard systems such as the Bengal, Flying Bridge, Husky and A-series. The
gross margin rate increase in both the three and nine month periods was
primarily due to a higher percentage of consumables and standard systems sales
relative to special systems sales versus the prior year periods. The Company saw
particular strength in sales of surface preparation equipment, the Husky and
HydroCat, during the quarter. These higher margin products continue to gain
market share.
Operating expenses of $12.6 million increased $1.4 million (13%) for
the three months ended January 31, 1999, compared to the prior year period and
were $38 million, up $6 million (19%) for the nine months ended January 31, 1999
versus the prior year period. Marketing expenses increased $710,000 (14%) and
$2.5 million (16%) for the three and nine months ended January 31, 1999,
respectively, as compared to the prior year periods. Expressed as a percentage
of revenues, marketing expenses were 18% and 16% for the three and nine months
ended January 31, 1999 versus 15% in both prior year periods. Research and
engineering expense increased $518,000 (20%) and $2.2 million (31%) for the
three and nine months ended January 31, 1999, respectively, as compared to the
prior year periods. The entire increase during the quarter and more than half of
the year to date increase relates to expenditures on the Fresher Under Pressure
program. As a percentage of revenues, research and engineering was 9% and 8% for
the three and nine months ended January 31, 1999, respectively, as compared to
8% and 7% of revenues for the three and nine months ended January 31, 1998,
respectively. Included in marketing, and research and engineering expenses are
Fresher Under Pressure development costs of over $600,000 and $1.6 million for
the three and nine months ended January 31, 1999. These expenses totaled $.03
and $.08 per diluted share in the three and nine month periods ended January 31,
1999. Excluding these expenses, Flow's diluted earnings per share would have
been $.13 and $.44 for the three and nine months ended January 31, 1999. General
& administrative expense increased $193,000 (6%) and $1.3 million (14%) for the
three and nine month periods ended January 31, 1999, respectively, as compared
to the prior year periods. However, for the nine months ended January 31, 1999
and 1998, general and administrative expenses expressed as a percent of revenue
were 10%.
-12-
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating income for the quarter ended January 31, 1999 was $3 million
as compared to $3.3 million in the prior year period. For the nine months ending
January 31, 1999, operating income was $10.3 million, an increase of $410,000
over the prior year period.
Third quarter fiscal 1999 interest and other expense, net of $1 million
increased $476,000 (86%) versus the prior year. The current quarter includes
$744,000 of interest expense, an increase of $216,000 versus the prior year
period due to higher average debt levels. Average outstanding debt for the
quarter was $45.1 million, an increase of $11.1 million compared to the prior
year third quarter. The higher debt levels are associated with the development
expenses and capital asset construction of the Fresher Under Pressure program, a
stock re-purchase program and increased inventories. The $285,000 of other
expense, net in the quarter represents an increase of $260,000 over last year.
The Company incurred approximately $150,000 in exchange rate losses during the
quarter. Additionally, settlements of approximately $80,000 were incurred during
the third quarter. Year-to-date, interest expense has increased $84,000 (4%) to
$2.3 million, while other expense, net was $351,000 versus other income, net of
$14,000 in the same period in fiscal 1998.
Based upon the expected tax position of the Company for fiscal 1999,
taxes for the nine months ended January 31, 1999 have been provided for at 29%
of pre-tax income. For the prior year period ended January 31, 1998, taxes were
provided for at 35% of pre-tax income; however, the net tax rate for the twelve
months ended April 30, 1998 was 29%. 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.
Basic shares outstanding for the three months ended January 31, 1999
and 1998 were 14,623,000 and 14,784,000, respectively. For the nine months ended
January 31, 1999 and 1998, basic shares outstanding were 14,757,000 and
14,671,000, respectively. Diluted shares outstanding for the three months ended
January 31, 1999 and 1998 were 14,957,000 and 15,133,000, respectively. The
diluted shares outstanding include potential dilutive common shares from
employee stock options of 334,000 and 349,000 for the three months ended January
31, 1999 and 1998, respectively. For the nine months ended January 31, 1999 and
1998, diluted shares outstanding were 15,110,000 and 15,003,000, respectively.
The diluted shares outstanding include potential dilutive common shares from
employee stock options of 353,000 and 332,000 for the nine months ended January
31, 1999 and 1998, respectively.
-13-
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company recorded net income of $1.4 million or $.10 per basic and
diluted share for the three months ended January 31, 1999, compared to $1.8
million, or $.12 per basic and diluted share for the prior year period. Year to
date, the Company recorded $5.4 million or $.37 per basic and $.36 per diluted
share as compared to $5 million or $.34 per basic and $.33 per diluted share in
fiscal 1998.
ACCESS AND SERVICES OPERATIONS ANALYSIS--
The Access and Services operations were sold during fiscal 1998 and
thus did not have any activity during fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $2.7 million from operations for the nine months
ended January 31, 1999 compared to $900,000 from operating activities during the
nine months ended January 31, 1998. Total debt, net of cash, at January 31, 1999
was $42.3 million, up $6.4 million (18%) from April 30, 1998. The increase in
debt results, in part, from the repurchase of 336,000 shares of the Company's
stock for $3.3 million and the development and manufacture of Fresher Under
Pressure units. At January 31, 1999, the Company had recorded $4.5 million in
completed Fresher Under Pressure units as well as work in progress and stores
inventory. Of this amount, $2.7 million is classified as property and equipment
and the remaining $1.8 million is included in inventory on the Consolidated
Balance Sheet. 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 January 31, 1999, the Company was in compliance with all such
covenants.
Gross trade receivables at January 31, 1999 increased $2 million (5%),
from April 30, 1998. Days sales in gross accounts receivable can be negatively
impacted by the traditionally longer payment cycle outside the United States as
well as timing of payments on large special 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.
-14-
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Inventories at January 31, 1999 increased $2.1 million (6%) from April
30, 1998. This increase includes a $5.9 million increase in UHP inventory and a
$3.8 million decrease in Access and Services inventory. The UHP increase
reflects $1.8 million in inventory for Fresher Under Pressure, 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 Access and Services decrease relates to the sale of inventory, at
cost, to SafeWorks LLC, the purchasers of the businesses. The Company had
provided manufacturing services through August 1998 as provided for in the sales
agreement. This agreement terminated in August 1998 and the remaining inventory
was sold at cost.
Year 2000 Issues and Conversion:
Background: Some computers, software, and other equipment include programming
code that limits the "year" field to two digits. Thus, these systems could fail
in the event that the last two digits "00" are interpreted to mean the year
1900. For this reason, the Company began the conversion process to upgrade its
systems in fiscal 1998.
Assessment: The Year 2000 issues could effect computers, software, and other
equipment used, or maintained by the Company. The Company has reviewed its
internal computer programs and systems to determine if the programs and systems
are Year 2000 ready. The Company believes that its computer systems will be Year
2000 ready in a timely manner. To date, the Company has converted and tested its
primary computer system and is currently upgrading the internal computer systems
of its subsidiaries.
The estimated costs of these efforts are $200,000 and are not expected to be
material to the Company's financial position or any of its financial results
from operations. There can however be no assurance to this effect. To date, no
other Information Technology projects that have a material effect on the
Company's operations have been deferred.
Software Sold to Customers: The Company develops its own proprietary software
which controls the functions of some of its machines. The Company also sells
software or other electronic control devices purchased from third party vendors.
The Company believes that it has substantially identified and resolved all
potential Year 2000 issues with any of its software products. However, the
Company believes that it is not possible to determine with complete certainty
that its products are entirely Year 2000 ready. As with most software, it is
dependent upon hardware and other operating systems that are provided by other
third party vendors not under the Company's control.
-15-
FLOW INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Internal Infrastructure: The Company is in the process of reviewing all of its
equipment that is used in the receiving, manufacturing, and shipping of its
products as well at its copiers, fax machines, elevators, telephone systems and
other equipment used to maintain daily operations. To date, the Company has not
identified any material issues that would effect the ongoing operations. The
Company is on schedule with its review of these systems and does not expect any
required modifications to have a material adverse effect on its future financial
results. However, the Company is continuing to monitor the process and this
estimate will be revised if additional material information is discovered.
Suppliers: The Company initiated communications with all of its critical
suppliers in April 1998. The form of this communication was by questionnaire
designed to determine the Year 2000 readiness of the suppliers business systems.
To date, the Company has completed the mailing of all questionnaires. The
Company is in the process of reviewing supplier responses. Based upon responses
to date, the Company believes that its critical suppliers will be Year 2000
ready and does not currently expect any adverse effects on its daily operations.
While the Company does not expect any material adverse effects, the Company can
provide no assurance that these suppliers will resolve all of their Year 2000
issues on a timely basis. The Company will continue to monitor this process and
revise its expectations as needed.
Risks: While the Company is taking steps in all areas discussed above, there can
be no assurance that all Year 2000 issues will be entirely resolved. Due to this
inherent uncertainty, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers and customers, there could be interruptions
or failures that would materially impact normal business operations. The Year
2000 Project is expected to significantly reduce the potential of any such
material adverse effects. Further, the Year 2000 Project includes the
development of contingency plans for those systems that are critical to daily
operations.
Readers are cautioned that the forward-looking statements contained in the Year
2000 Issues and Conversion should be read in conjunction with the Company's
disclosures under the heading: "Safe Harbor Statement'.
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.
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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
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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: March 9, 1999 /s/ RONALD W. TARRANT
------------------------------
Ronald W. Tarrant
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 9, 1999 /s/ STEPHEN D. REICHENBACH
------------------------------
Stephen D. Reichenbach
Executive Vice President, Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
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