10-Q 1 a2025683z10-q.txt 10-Q 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 July 31, 2000 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 August 28, 2000: 14,761,565 shares. -1- FLOW INTERNATIONAL CORPORATION INDEX
PAGE ---- Part I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets - July 31, 2000 and April 30, 2000................................................................ 3 Consolidated Statements of Income - Three Months Ended July 31, 2000 and 1999....................................................... 4 Consolidated Statements of Cash Flows - Three Months Ended July 31, 2000 and 1999....................................................... 5 Consolidated Statements of Comprehensive Income - Three Months Ended July 31, 2000 and 1999....................................................... 6 Notes to Consolidated Financial Statements........................................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 9 Part II - OTHER INFORMATION Item 1. Legal Proceedings............................................................................ 14 Item 2. Changes in Securities........................................................................ 14 Item 3. Defaults Upon Senior Securities.............................................................. 14 Item 4. Submission of Matters to a Vote of Security Holders...................................................................... 14 Item 5. Other Information............................................................................ 14 Item 6. Exhibits and Reports on Form 8-K............................................................. 14 Signatures................................................................................................ 15
-2- FLOW INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
July 31, April 30, 2000 2000 --------- --------- ASSETS (unaudited) Current Assets: Cash $ 7,473 $ 6,383 Receivables, less allowances for doubtful accounts of $877 and $899, respectively 53,020 67,793 Inventories, net 54,193 49,168 Deferred Income Taxes 1,931 1,900 Other Current Assets 5,477 5,963 --------- --------- Total Current Assets 122,094 131,207 Property and Equipment, net 21,912 21,024 Intangible Assets, net of accumulated amortization of $11,097 and $10,306, respectively 38,334 39,124 Deferred Income Taxes 392 572 Other Assets 4,487 5,114 --------- --------- $ 187,219 $ 197,041 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable $ 953 $ 5,290 Current Portion of Long-Term Obligations 3,945 3,926 Accounts Payable 11,705 15,648 Accrued Payroll and Related Liabilities 5,747 5,948 Other Accrued Taxes 325 523 Deferred Revenue 4,563 2,476 Other Accrued Liabilities 7,469 9,844 --------- --------- Total Current Liabilities 34,707 43,655 Long-Term Obligations 74,595 70,397 Customer Deposits 9,056 14,483 Minority Interest 2,137 1,837 Stockholders' Equity: Series A 8% Convertible Preferred Stock - $.01 par value, 1,000,000 shares authorized, none issued Common Stock - $.01 par value, 20,000,000 shares authorized, 14,761,565 shares outstanding at July 31, 2000 14,736,081 shares outstanding at April 30, 2000 148 147 Capital in Excess of Par 41,182 41,041 Retained Earnings 35,993 34,514 Accumulated Other Comprehensive Loss (10,599) (9,033) --------- --------- Total Stockholders' Equity 66,724 66,669 --------- --------- $ 187,219 $ 197,041 ========= =========
See Accompanying Notes to Consolidated Financial Statements -3- FLOW INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited; in thousands, except per share data)
Three Months Ended July 31, -------------------- 2000 1999 Revenues $ 50,427 $ 41,261 Cost of Sales 29,008 23,303 -------- -------- Gross Profit 21,419 17,958 Expenses: Marketing 7,806 6,964 Research and Engineering 4,578 3,696 General and Administrative 4,924 3,965 -------- -------- 17,308 14,625 -------- -------- Operating Income 4,111 3,333 Interest Expense (1,802) (1,349) Other Expense, net (196) (125) -------- -------- Income Before Provision for Income Taxes 2,113 1,859 Provision for Income Taxes 634 559 -------- -------- Net Income $ 1,479 $ 1,300 ======== ======== Basic Earnings Per Share $ .10 $ .09 ======== ======== Diluted Earnings Per Share $ .10 $ .09 ======== ========
See Accompanying Notes to Consolidated Financial Statements -4- FLOW INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited; in thousands)
Three Months Ended July 31, -------------------- 2000 1999 Cash Flows from Operating Activities: Net Income $ 1,479 $ 1,300 Adjustments to Reconcile Net Income to Cash Provided (Used) by Operating Activities: Depreciation and Amortization 1,990 1,949 Unrealized (Gain) Loss on Securities 57 (5) Decrease / (Increase) in assets 10,840 (5,842) Decrease in liabilities (9,757) (1,948) -------- -------- Cash provided (used) by operating activities 4,609 (4,546) -------- -------- Cash Flows from Investing Activities: Expenditures for property and equipment (2,032) (2,100) -------- -------- Cash used by investing activities (2,032) (2,100) -------- -------- Cash Flows from Financing Activities: Borrowings under line of credit agreements, net 201 1,957 Payments of long-term obligations (321) (473) Proceeds from issuance of common stock 142 180 -------- -------- Cash provided by financing activities 22 1,664 -------- -------- Effect of exchange rate changes (1,509) 144 -------- -------- Increase (decrease) in cash and cash equivalents 1,090 (4,838) Cash and cash equivalents at beginning of period 6,383 10,403 -------- -------- Cash and cash equivalents at end of period $ 7,473 $ 5,565 ======== ========
See Accompanying Notes to Consolidated Financial Statements -5- FLOW INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited, in thousands)
Three Months Ended July 31, ------------------ 2000 1999 Net Income $ 1,479 $ 1,300 Other Comprehensive Income: Unrealized (Loss) Gain on Equity Securities Available (57) 5 for Sale, net of tax Cumulative Translation Adjustment (1,509) 144 ------- ------- Comprehensive Income (Loss) $ (87) $ 1,449 ======= =======
See Accompanying Notes to Consolidated Financial Statements -6- FLOW INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended July 31, 2000 (unaudited) 1. In the opinion of the management of Flow International Corporation ("the Company"), the accompanying unaudited consolidated financial statements contain all adjustments necessary to fairly present the financial position, results of operations and cash flows of the Company. These interim financial statements do not include all information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, and should be read in conjunction with the April 30, 2000 consolidated financial statements included in the Company's Annual Report filed with the Securities and Exchange Commission on Form 10-K. Operating results for the three months ended July 31, 2000 may not be indicative of future results. 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, 2000 and 1999 were 14,742,000 and 14,685,000, respectively. Diluted shares outstanding for the three months ended July 31, 2000 and 1999 were 15,108,000 and 15,068,000, respectively. The diluted shares outstanding include potential dilutive common shares from employee stock options of 366,000 and 383,000 for the three months ended July 31, 2000 and 1999, respectively. 3. Inventories consist of the following: (in thousands)
July 31, 2000 April 30, 2000 ------------- -------------- Raw Materials and Parts $24,178 $26,925 Work in Process 17,269 11,760 Finished Goods 12,746 10,483 ------- ------- $54,193 $49,168 ======= =======
-7- FLOW INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended July 31, 2000 (unaudited) 4. Business Acquisitions: In September 1999 the Company purchased substantially all of the assets and selected liabilities of Spearhead Automated Systems, Inc. ("Spearhead") for $4.5 million. Spearhead manufactures advanced cutting, trimming and tooling equipment for the automotive and related industries. 5. Recently Issued Accounting Pronouncements Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities", is effective beginning in fiscal 2001, with early adoption permitted. FAS 133 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. The Company is currently reviewing the requirements of FAS 133 and assessing its impact on the Company's financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management has not yet determined the impact SAB 101 would have on the financial position or results of operations of the Company. This statement will be adopted by the Company no later than February 1, 2001. 6. Certain 2000 amounts have been reclassified to conform with the 2001 presentation. These reclassifications had no effect on previously reported net income. -8- FLOW INTERNATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue for Flow International Corporation ("Flow" or the "Company") for the three month period ended July 31, 2000 was $50.4 million, an increase of $9.2 million (22%) as compared to the prior year period. This growth included revenues from the September 1999 acquisition of Spearhead Automated Systems, Inc. ("Spearhead"), as well as a quarter-over-quarter increase in Fresher Under Pressure(R) revenues of $2.5 million. Excluding Spearhead and Fresher Under Pressure, revenue increased 10% for the quarter ended July 31, 2000 as compared to the prior year period. 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, and may also include automation capabilities. Also included in systems sales are Fresher Under Pressure revenues and sales of isostatic and flex form press systems from the Company's Swedish subsidiary, Flow Pressure Systems. Consumables represent parts used by the pump and cutting head during operation. Systems revenues for the three months ended July 31, 2000 were $36.7 million, an increase of $9.1 million (33%) compared to the prior year. Consumables revenues were $13.7 million for the three months ended July 31, 2000, a $103,000 (1%) increase versus the prior year period. There have not been any significant price increases or decreases for the Company's products. Geographically, domestic revenue was $33.9 million, an increase of $9.2 million (37%) as compared to the prior year period. Excluding the effect of Spearhead and Fresher Under Pressure, domestic revenues increased 26%. This performance was substantially better than the United States machine cutting tool market as a whole which decreased 10% for the 3 months ended June 30, 2000 according to the Association for Manufacturing Technology. European revenue was $11.8 million, a decrease of $1.5 million (11%) as compared to the prior year period, and represented 23% of total revenues. This decrease resulted from the growth in Fresher Under Pressure. Flow Pressure Systems manufactures product for sale both in Europe and the United States. During the first quarter, Flow Pressure Systems shifted their production to Fresher Under Pressure systems which are being sold in the United States, which resulted in the reduction of European revenues. Asian revenue was $4.8 million, an increase of $1.4 million (44%) as compared to the prior year period, and represented 9% of total revenues. This represents the third consecutive quarter of year-over-year growth from Asia. The Company has developed the technology to apply ultrahigh-pressure ("UHP") to food, calling it Fresher Under Pressure. By exposing foods to pressures up to 100,000 pounds per square inch (psi) for a short time, typically 30 seconds to slightly more than two minutes, UHP achieves the effects of pasteurization without heat. Not only are spoilage microorganisms destroyed, the process also destroys harmful pathogens such as E. coli, listeria and salmonella, thus increasing shelf life while ensuring a safe, healthy product. Unlike thermal treatment (pasteurization) or other methods such as irradiation, -9- FLOW INTERNATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) UHP processing does not destroy or alter the nutritional qualities, taste, texture or color of the food. Flow has a `continuous flow' concept whereby pumpable foods such as juices, salsas, guacamole, liquid eggs and salad dressings are pumped into pressure chambers, pressurized and then pumped into the next stage of the process, such as bottling. This continuous flow process is fully automated and requires just a single operator. The Company also has the ability to UHP process non-pumpable foods, such as meats and seafood via a patented large pressure vessel batch system technology. Flow is the only supplier of complete UHP systems to the food industry. The Company anticipates leasing the continuous flow systems and selling the batch systems. The leases have a fixed monthly charge plus a per gallon or per pound usage fee. Lease revenue is recognized monthly based on throughput. Revenue for the batch systems is recognized on the percentage of completion method. Included in revenues for the three month period ended July 31, 2000 is approximately $2.8 million associated with the Fresher Under Pressure technology, which meets management expectations, compared with approximately $300,000 in the first quarter of fiscal 2000. The Company estimates fiscal 2001 revenues related to both batch and continuous flow food purification systems will exceed $14 million, a doubling of fiscal 2000 revenues and also anticipates this market will double each year for the next three years. Based upon research conducted by outside consultants from Business Communications Corp, food safety spending on non-thermal production equipment will exceed $440 million by 2003. The research report also forecasts that UHP processing could be 50% of this market. Management anticipates that the Company will be in a position to capture a significant portion of this UHP market. Gross profit for the quarter was $21.4 million, an increase of $3.5 million (19%) over the prior year period. Gross profit expressed as a percentage of revenues (gross margin rate) was 42% for the quarter, down from 44% in the comparable prior year period. Comparison of gross margin rates is dependent on the mix of sales revenue types, which includes 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, Integrated Flying Bridge, Husky, and Waterjet Machining Center(TM). Operating expenses of $17.3 million increased $2.7 million (18%) for the three months ended July 31, 2000, compared to the prior year period. Marketing expenses increased $842,000 (12%) as compared to the prior year period. Expressed as a percentage of revenue, marketing expenses decreased to 15% for the three months ended July 31, 2000, versus 17% in the prior year period. Research and engineering expenses increased $882,000 (24%) as compared to the prior year period. Expressed as a percentage of revenue, research and engineering expense was comparable to the prior year -10- FLOW INTERNATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) period at 9%. The increase in research and engineering expense includes the impact of the Spearhead acquisition, additional expenses associated with two large aerospace jobs and increased costs associated with engineering the Fresher Under Pressure systems. General and administrative expenses increased $959,000 (24%) for the three month period ended July 31, 2000, as compared to the prior year period. Expressed as a percentage of revenue, general and administrative expense was comparable to the prior year period at 10%. Operating income of $4.1 million increased $778,000 (23%) for the three months ended July 31, 2000, compared to the prior year period. Current quarter interest expense increased $453,000 (34%) versus the prior year period due to a higher average debt level associated with the Spearhead acquisition and Fresher Under Pressure development costs, as well as increased interest rates. Based upon the expected tax position of the Company for fiscal 2001, taxes for the three months ended July 31, 2000 have been provided at 30% of pre-tax income. First quarter fiscal 2000 taxes were also provided at 30% of pre-tax income; however, the net tax rate for the twelve months in fiscal 2000 was 28%. The increased rate of 30% in fiscal 2001 as compared to the net twelve month fiscal 2000 rate of 28% 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 and benefits from the foreign sales corporation. Basic shares outstanding for the three months ended July 31, 2000 and 1999 were 14,742,000 and 14,685,000, respectively. Diluted shares outstanding for the three months ended July 31, 2000 and 1999 were 15,108,000 and 15,068,000, respectively. The diluted shares outstanding include potential dilutive common shares from employee stock options of 366,000 and 383,000 for the three months ended July 31, 2000 and 1999, respectively. The Company recorded net income of $1.5 million or $.10 per basic and diluted share for the three months ended July 31, 2000, compared to $1.3 million, or $.09 per basic and diluted share for the same prior year period. LIQUIDITY AND CAPITAL RESOURCES The Company generated $4.6 million from operations during the three months ended July 31, 2000 compared to using $4.5 million from operating activities during the three months ended July 31, 1999. At July 31, 2000, the Company had $18 million in completed continuous feed Fresher Under Pressure units as well as work in progress and -11- FLOW INTERNATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) stores inventory. Of this amount, $7.3 million is classified as property and equipment and the remaining $10.7 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 July 31, 2000 the Company obtained a waiver of its asset coverage covenant. The Company anticipates the covenant will be amended during the second quarter. Exclusive of this one covenant, the Company was in compliance with all other covenants as of July 31, 2000. Gross receivables at July 31, 2000 decreased $14.8 million (22%) from April 30, 2000. This decrease includes collection of several large receivables, in addition to a reduction in unbilled revenues which have been offset with customer deposits upon system shipments during the quarter. 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. Inventories at July 31, 2000 increased $5 million (10%) from April 30, 2000. Included in these totals is an increase in work in process of $5.5 million. Certain products manufactured by Pressure Systems, Flow Robotics and Flow Automation can require an extended manufacturing period and thus impact inventory levels from period to period. Flow Robotics and Pressure Systems manufacturing contracts accounted for $3.9 million of this increase. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the three months ended July 31, 2000. For additional information, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations as presented in the fiscal 2000 Annual Report to Stockholders. -12- FLOW INTERNATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Year 2000 Issues: To date, the Company has not experienced any material issues with respect to Year 2000 that have effected the ongoing operations. Throughout the remainder of Year 2000, there may be dates which do cause interruptions or failures that could materially impact normal business operations. While the Company has taken steps to resolve Year 2000 issues, there can be no assurance that these issues are entirely resolved as of this date. 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 2000 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. -13- 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 -14- 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 13, 2000 /s/ Ronald W. Tarrant ---------------------- Ronald W. Tarrant Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: September 13, 2000 /s/ Stephen D. Reichenbach -------------------------- Stephen D. Reichenbach Executive Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -15-