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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, 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
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. [ ]
1
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 17,
1999, was $152,000,000. The number of shares of common stock outstanding as
of June 17, 1999, was 14,276,292 shares.
2
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
3
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 systems. Flow
provides technologically-advanced, environmentally-sound solutions to the
manufacturing, industrial and marine cleaning markets. The Company's waterjet
systems pressurize water from 30,000 to over 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, tile and other stone
cutting, and paper industries. Additionally, the Company manufactures a
product line for use in industrial cleaning, surface preparation,
construction, nuclear decontamination, and petro-chemical and oil field
applications. The Company also manufactures the robotic articulation
equipment used in the cutting and cleaning processes which may also include
assembly, pick and place and load/unload operations.
In addition to UHP cutting and cleaning, the Company has begun to apply
UHP technology to food, also known as "Fresher Under Pressure"-TM-. By
exposing foods to pressures from 50,000 psi to over 100,000 psi for a short
time, typically 30 seconds to slightly more than 2 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
bacteria, thus increasing shelf life while ensuring a safe, healthy product.
Unlike thermal treatment (pasteurization), UHP technology does not destroy or
alter the nutritional qualities, taste, texture and color of the food. Flow
has developed a technology which features a `continuous flow' concept whereby
pumpable foods such as juice, salsas, guacamole, liquid eggs and salad
dressings are pumped into the 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 as a result of the
March 1999 acquisition of Flow Pressure Systems Vasteras AB ("Pressure
Systems"). Pressure Systems provides Flow the patented large batch system
vessel technology. Flow is the leader in both the continuous feed and batch
UHP food processing technology.
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.
On December 15, 1994, the Company purchased certain net assets of
Dynovation Machine Systems, Inc. ("Flow Automation"). Flow Automation designs
and manufactures
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robotic waterjet cutting cells and automated assembly systems for the
automotive and other industries.
On January 3, 1995, the Company purchased certain net assets of ASI
Robotics Systems, Inc. ("Flow Robotics"). Flow Robotics designs and
manufactures high accuracy gantry-type robots and related systems used in
waterjet and factory automation applications. This manufacturing facility
supplies product to the aerospace, automotive, job shop, marble and tile and
other industries.
In May 1995, the Company invested in a 51% majority interest in a joint
venture with Okura & Co., Ltd., its exclusive Japanese distributor. This
joint venture, Flow Japan, supplies UHP products in Japan and to Japanese
companies throughout Asia. During March 1998 the Company increased its
ownership interest in Flow Japan to 95%.
In May 1997 the Company purchased the stock of Foracon Maschinen und
Anlagenbau GmbH & CO.KG ("Foracon"). Foracon supplies UHP and related systems
to the European market and performs metal fabrication of Flow Europe's UHP
systems.
In September 1997 the Company re-focused on its core ultrahigh-pressure
technology and divested itself of its Access and Services business. The
Access business was comprised of Spider Staging Corporation ("Spider"), Power
Climber and affiliated companies, the Ark Systems division and Consortium
Europeen du Materiel ("CEM"). These companies were purchased at various times
between fiscal 1993 and fiscal 1995. The Services business represented the
HydroMilling-Registered Trademark- and HydroCleaning-TM- operations. The
Company recorded a $4.9 million restructuring charge during fiscal 1998 and
$9 million restructuring charge in fiscal 1997 associated with the
divestiture of these operations.
In April 1998 the Company purchased certain net assets of CIS Robotics
Inc. ("CIS") and acquired the stock of Robot Simulations Limited ("Flow
Software Technologies Ltd.") of the U.K. CIS provides robot programming
services, primarily to the automotive industry, while Flow Software
Technologies Ltd markets a PC software program for control systems and
off-line programming of pedestal robots.
In March 1999 the Company purchased the stock of Pressure Systems from
Asea Brown Boveri AB and acquired a 51% voting interest in a related U.S.
joint venture, Flow Autoclave Systems Inc. ("Flow Autoclave"). Pressure
Systems is the leading supplier of large, bulk ultrahigh-pressure systems to
the food industry and the world leader in isostatic press systems for the
aerospace and automotive industries. Flow Autoclave markets the Pressure
Systems product domestically.
5
PRODUCTS AND SERVICES
The Company provides UHP waterjets and related products and services to
a wide variety of industries. The Company divides its UHP revenues into two
primary categories of product, `UHP Waterjet Systems' and `UHP Consumable
Parts and Services':
(In thousands)
1999 % 1998 % 1997 %
-------------------------------------------------
UHP Waterjet Systems $ 94,040 63 $ 94,728 66 $ 71,658 64
UHP Consumable Parts and Services 54,162 37 47,904 34 40,774 36
-------------------------------------------------
Total UHP Revenue $148,202 100 $142,632 100 $112,432 100
-------------------------------------------------
-------------------------------------------------
In addition to UHP revenue, the Company's fiscal 1998 and 1997
consolidated revenue also include the non-core Access and Services operations
which were sold in September 1997. These operations are represented below as
Access and Services. The following table presents consolidated revenues for
the year ended April 30:
(In thousands)
1999 % 1998 % 1997 %
-------------------------------------------------
Total UHP Revenues $148,202 100 $142,632 89 $112,432 67
Access and Services - - 16,850 11 55,761 33
-------------------------------------------------
Total Consolidated Revenues $148,202 100 $159,482 100 $168,193 100
-------------------------------------------------
-------------------------------------------------
UHP WATERJET SYSTEMS, CONSUMABLE PARTS AND SERVICES
The Company offers a variety of UHP waterjet equipment system products
and accessories, including robotic articulation equipment. UHP pumps,
intensifier and direct-drive, are currently the core components of the
Company's product line. An intensifier pump pressurizes water to in excess of
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 secondary operation.
A UHP waterjet system consists of an ultrahigh-pressure intensifier or
direct drive pump, one or more waterjet cutting or cleaning heads with the
necessary robotics, motion control and automation systems. The Company has
placed UHP waterjet cutting systems worldwide and in
6
many different industries, including the aerospace, automotive, disposable
products, food, glass, job shop, sign, metal cutting, marble, tile and other
stone cutting and paper industries. The Company's waterjet systems are also
used in industrial cleaning applications such as paint removal, surface
preparation, factory and industrial cleaning, ship hull preparation, oil
field services and heat exchanger cleaning. Additionally, the Company
manufactures systems which combine waterjet applications with other processes
such as pick and place operations, inspection, assembly, and other automated
processes. Sales of waterjet systems accounted for 63% of fiscal 1999
revenues.
Flow sells various tools and accessories which incorporate waterjet
technology, as well as aftermarket consumable parts and service for its
products. Consumables primarily represent parts used by the pump and cutting
head driving operation. Many of these parts are proprietary in nature. Sales
of consumable parts and service accounted for 37% of fiscal 1999 revenues.
The Company's products are considered productivity enhancing tools and
can be cost justified over traditional cutting methods. The Company's sales
will be affected by worldwide economic changes, however the Company should
continue to gain market share even in `down' economies due to the cost
savings generated by waterjet technology. Additionally, consumable parts
sales represent a base level of business that is not as greatly affected by
the capital goods sales cycle.
ACCESS SYSTEMS AND SERVICES
Prior to the divestiture of its Access business in September 1997, the
Company designed, manufactured, rented, sold, and serviced powered access
systems for use in industrial, structural and facade maintenance and
construction applications. The Company also provided as a service, the
removal of deteriorated concrete from bridges and parking garage surfaces.
Flow's Rampart subsidiary provided ultrahigh-pressure waterjets which were
used for the removal of rubber, paint and grout from airport runways.
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 Birmingham, England; Bretton
and Darmstadt, Germany; Burlington and Windsor, Canada; Stockholm Sweden;
Columbus, Ohio; Detroit, Michigan; Hsinchu, Taiwan; Jeffersonville, Indiana;
Lafayette, Louisiana and Nagoya and Tokyo, Japan. The Company sells directly
to customers in North and South 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
service 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, 1999.
7
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 requirements in targeted market segments. This
information is used to develop standardized and customized solutions using
UHP waterjet and robotics technologies. 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 in
our target markets. The Company also attends trade shows for targeted market
segments and advertises in selected industry publications.
PATENTS AND LICENSES
The Company holds a large number of patents relating to waterjet
technology and related systems. 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 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, 1999, the Company's backlog was $35.8 million, almost
double that of the prior year end backlog of $18.5 million. The nature of the
Company's business is that most products, exclusive of the Pressure Systems
product, can be shipped within a four to eight week period and thus backlog
and the changes in the Company's backlog are not necessarily indicative of
comparable variations in sales or earnings. The April 30, 1999 backlog
represented 24% of fiscal 1999 sales. Based upon the terms of the customer
contracts and the Company's manufacturing schedule, all of the revenue
backlog as of April 30, 1999 is expected to be realized during fiscal 2000.
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.
8
COMPETITION
The major competitors for UHP waterjet systems are conventional cutting
and cleaning methods. These methods include saws, knives, shears, plasma,
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, versatility in the
different types of product that can be cut, cutting speed 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 hazardous
material containment or reduction of secondary operations in the production
process. The many advantages of a waterjet over traditional cutting and
cleaning methods have positioned it in the market as a productivity enhancing
tool.
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 complete waterjet cutting systems. 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.
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
technological leadership, (4) the ability to provide complete turnkey
systems, (5) a strong position in key markets, such as in 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 spent between 5% and 8% of revenues in research and
engineering during each of the three years ended April 30, 1999. Research and
engineering expenses were $12.4 million in 1999, $10.3 million in 1998, and
$8.7 million in 1997. The Company will continue a high level of research &
engineering spending to maintain its technological leadership position
through development of new products and applications as well as enhancing its
current product line.
9
EMPLOYEES
As of April 30, 1999, the Company employed 945 full time and 11 part
time personnel. There are no material collective bargaining agreements to
which the Company is a party.
FOREIGN AND DOMESTIC OPERATIONS
See Note 15 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.
The success of the Company's most recently announced technology,
"Fresher Under Pressure" will be dependent on consumer acceptance of the
technology as well as the Company's ability to conform the technology to any
food and beverage regulations.
The Company's financial performance could be negatively affected if the
Company's or its suppliers computer systems are not Year 2000 ready.
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
The Company's headquarters and primary manufacturing facilities are
located in two leased facilities in Kent, Washington. The Company also
manufactures product in Bretton and Darmstadt, Germany; Burlington, Canada;
Stockholm, Sweden; Hsinchu, Taiwan and Jeffersonville, Indiana. The Company
sells product through all of these locations in addition to offices located
in Birmingham, England; Detroit, Michigan; Nagoya and Tokyo, Japan and
Windsor, Canada.
All facilities of the Company are leased with the exception of a
manufacturing facility in Jeffersonville, Indiana.
10
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.
11
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 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- --------------------------------------------------------------------------------
See pages 26 through 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------------
None.
12
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 following table.
Fiscal Year 1999 Fiscal Year 1998
High Low High Low
--------------------------------------------
First Quarter $12.75 $10.69 $10.38 $7.88
Second Quarter 10.75 8.38 11.75 9.13
Third Quarter 12.06 9.13 11.25 9.13
Fourth Quarter 11.13 8.44 10.69 9.56
There were 1,286 stockholders of record as of June 17, 1999.
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
- --------------------------------------------------------------------------------
(In thousands, except per share amounts) Year Ended April 30,
-------------------------------------------------------------------------------------------------------------
1999* 1998* 1997* 1996 1995
--------------------------------------------------------------------
Income Statement Data:
Revenue $148,202 $159,482 $168,193 $144,905 $110,010
Pretax Income 9,336 6,505 963 8,902 9,259
Net Income 6,722 4,803 725 7,085 7,728
Basic Earnings Per Share 0.46 0.33 0.05 0.49 0.55
Diluted Earnings Per Share 0.45 0.32 0.05 0.47 0.53
Balance Sheet Data:
Working Capital $79,993 $59,863 $68,126 $57,866 $44,592
Total Assets 179,152 121,181 133,466 126,493 105,484
Short-Term Debt 4,604 6,905 1,730 3,339 2,412
Long-Term Obligations 64,614 32,076 53,569 45,590 33,359
Stockholders' Equity 64,022 61,195 56,753 57,060 49,803
* See Note 4 of the Consolidated Financial Statements which describes the
disposition of certain business units during fiscal 1998 and the related
restructuring provisions in fiscal 1998 and 1997.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company provides ultrahigh-pressure ("UHP") waterjets and related
products and services to a wide variety of industries. Waterjet cutting is
recognized as a better alternative to traditional cutting methods such as
saws, plasma or laser systems. It is faster, has greater versatility in the
types of products it can cut and eliminates the need for secondary processing
operations. The Company divides its UHP revenues into two primary categories
of product, `UHP Waterjet Systems' and `UHP Consumable Parts and Services'.
CONSOLIDATED REVENUES BY MAJOR PRODUCT CATEGORIES
(In thousands) 1999 1998 1997
Revenue % Revenue % Revenue %
----------------------------------------------------------------------
UHP Waterjet Systems $94,040 63 $94,728 66 $71,658 64
UHP Consumable Parts and Services 54,162 37 47,904 34 40,774 36
----------------------------------------------------------------------
Total UHP Revenues $148,202 100 $142,632 100 $112,432 100
----------------------------------------------------------------------
----------------------------------------------------------------------
In addition to UHP revenue, the Company's fiscal 1998 and 1997 consolidated
revenues also include the non-core Access and Services operations that were sold
in September 1997. These operations included Spider Staging Corporation, Power
Climber and affiliated companies, the Ark Systems division, Consortium Europeen
du Materiel, the HydroMilling-Registered Trademark- division and Rampart
Waterblast, Inc..
(In thousands) 1999 1998 1997
Revenue % Revenue % Revenue %
----------------------------------------------------------------------
Total UHP Revenues $148,202 100 $142,632 89 $112,432 67
Access and Services - 16,850 11 55,761 33
----------------------------------------------------------------------
Total Consolidated Revenues $148,202 100 $159,482 100 $168,193 100
----------------------------------------------------------------------
----------------------------------------------------------------------
FISCAL 1999 COMPARED TO FISCAL 1998
During the second quarter of fiscal 1998 the Company sold its non-core
Access and Services operations.
14
The following pro forma table separates the Company's fiscal 1998
consolidated income statement into the ongoing operations (UHP) and the
divested operations (Access and Services). The Access and Services results
include an associated $4.9 million restructuring charge. This charge is
included as a separate component of operating expenses in the accompanying
Consolidated Statements of Income.
(In thousands) Year Ended April 30, 1998
-------------------------
Access &
UHP Services Consolidated
---------------------------------------
Revenue $142,632 $16,850 $159,482
Gross profit 58,958 5,247 64,205
Operating expenses 45,593 8,427 54,020
Operating income / (loss) 13,365 (3,180) 10,185
Interest / other expense, net (3,303) (377) (3,680)
Pretax income / (loss) 10,062 (3,557) 6,505
As fiscal 1999 does not include the divested Access and Services operations, the
following Results of Operations review compares only the ongoing UHP operations.
UHP RESULTS OF OPERATIONS ANALYSIS
The following analysis presents a year over year comparison of the UHP
operations. The following pro forma table presents the results of operations of
the Company's UHP business only:
(In thousands) Year ended
April 30,
-------------------------
1999 1998
-------------------------
Revenue $ 148,202 $ 142,632
Gross profit 65,231 58,958
Operating expenses:
Marketing 24,847 21,952
Research & engineering 12,396 9,990
General & administrative 14,888 13,651
--------- ---------
52,131 45,593
--------- ---------
Operating income 13,100 13,365
Interest expense, net (3,177) (2,886)
Other expense, net (587) (417)
--------- ---------
Pretax income 9,336 10,062
Net income $ 6,722 $ 7,144
15
Revenues for the year ended April 30, 1999 were $148.2 million, an
increase of $5.6 million (4%) over the prior year period. The Company's
revenues can be segregated into two primary categories, systems sales and
consumables sales. Systems are generally comprised of a pump along with the
robotics or articulation used to move the cutting or cleaning head. Systems
are further broken down between standard systems such as the
Bengal-Registered Trademark-, Integrated Flying Bridge and A-Series, and
special or custom designed systems used primarily in the aerospace and
automotive markets. Systems sales in fiscal 1999 were $94 million, a decrease
of $688,000 (1%) over the prior year. Included in this decrease was an $8.5
million reduction in large custom designed systems versus the prior year.
Weakness in the automotive and aerospace markets account for this decrease.
In addition, the average standard domestic system selling price has decreased
by 10% as the lower cost systems, such as the Integrated Flying Bridge and
Bengal, now deliver improved accuracy and feature enhancements that were
formerly found only on the more expensive models. Consumables are primarily
parts used by the pump and cutting head during operation. Consumable parts
and services revenues increased $6.3 million (13%) to $54.2 million in fiscal
1999. The consumable parts increase reflects the expanding base of waterjet
systems installed throughout the world.
Domestically, revenues increased 9% to $77.5 million and represent 52%
of fiscal 1999 sales. This increase in revenues was achieved in spite of a
27% decrease in the U.S. cutting machine tool market for the 12 months ended
April 30, 1999 according to the Association for Manufacturing Technology
("AMT"). The Company did however experience weakness domestically during the
fourth quarter of fiscal 1999 with an 8% decline in domestic sales as
compared to the prior year. According to AMT, the domestic cutting machine
tool market dropped 47% during the first calendar quarter of 1999. Management
believes the decline in fourth quarter domestic sales is a function of a
tightening economy as opposed to a reduction in the benefits of the waterjet
cutting technology over competitive technologies. European revenues posted
the strongest geographic gain, 22% to $42 million and represent 28% of total
revenues. The Company experienced weakness in the Asian region, where
revenues decreased $4.4 million (23%) to $14.9 million. Weakness in Japan
accounted for $3.5 million of this drop. Sales in the remainder of the world,
primarily Canada, Mexico and South America also decreased 23% to $13.9
million. The Company typically sells its products at higher prices outside
the United States due to the costs of servicing these markets. The Company
did not significantly raise prices during fiscal 1999.
The Company has begun to apply UHP technology to food, also known as
"Fresher Under Pressure". By exposing foods to pressures from 50,000 psi to
over 100,000 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, but the process also destroys
harmful pathogens such as E. coli bacteria, thus increasing shelf life while
ensuring a safe, healthy product. Unlike thermal treatment (pasteurization),
UHP technology does not destroy or alter the nutritional qualities, taste,
texture or color of the food. Flow has developed a technology that features 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
16
flow process is fully automated and requires just a single operator. The
Company also has the ability to UHP process non-pumpable foods as a result of
the March 1999 acquisition of Flow Pressure Systems Vasteras AB ("Pressure
Systems"). Pressure Systems provides Flow the patented large batch system
vessel technology. Flow is the leader in both the continuous feed and batch
UHP food processing technology. The Company has delivered two continuous flow
technology systems and is producing several other systems for near-term
delivery. The Company is leasing the continuous flow technology and, as such,
the deliveries did not result in revenue recognition in fiscal 1999. These
leases have a fixed monthly charge plus a per gallon or per pound usage fee.
The batch processing systems manufactured by Pressure Systems are sold, not
leased. The Company estimates fiscal 2000 revenues related to both batch and
continuous flow food purification systems will be between $7 million and $10
million depending on when clients launch their new fresh products. Management
also anticipates this market will double each year for the next three years.
Gross profit for the year ended April 30, 1999 increased $6.3 million
(11%) on just a 4% increase in sales. Gross profit expressed as a percentage
of revenue (gross margin rate) was 44% in fiscal 1999 as compared to 41% in
fiscal 1998. In general, gross margin rates on systems sales are less than
45% and on consumables sales are in excess of 50%. As such, the gross margin
rate can vary depending on the revenue mix between systems, both standard and
special, and consumables sales. Systems sales represented 63% of fiscal 1999
revenues, down from 66% in the prior year, and consumables sales represented
37% of fiscal 1999 revenues, up from 34% in the prior year. The increase in
gross margin rate was a function of the shift in revenue towards a greater
percentage of consumables sales, as well as an increase in standard system
sales, as compared to special systems. On average, standard systems carry
higher margins than the custom engineered systems. Additionally, production
efficiencies and greater throughput resulted in reduced costs.
Total operating expenses of $52.1 million increased $6.5 million (14%)
over the prior year. Expressed as a percentage of revenues, operating
expenses increased to 35% in fiscal 1999 from 32% in fiscal 1998. Marketing
expense of $24.8 million increased $2.9 million (13%) as compared to the
prior year, and expressed as a percentage of revenues, increased to 17% from
15% in the prior year. This increase includes marketing activity for "Fresher
Under Pressure" and several major trade shows including IMTS and EMO, both of
which are held every other year. Research and engineering expense in fiscal
1999 increased $2.4 million (24%) to $12.4 million as compared to the prior
year. Approximately $2.1 million of this increase was development of the
"Fresher Under Pressure" technology. Management will continue to aggressively
pursue technological advances through increased research and engineering
spending to maintain the Company's technological superiority. As a percentage
of revenues, research and engineering expenses were 8% in fiscal 1999 as
compared to 7% in fiscal 1998. General & administrative expense of $14.9
million increased $1.2 million (9%) for the year as compared to the prior
year. Expressed as a percentage of revenues however, general and
administrative expenses were comparable to the prior year at 10%.
17
Operating income can vary significantly for domestic and foreign
operations, but is primarily the result of product mix variations and volume
from year to year. Management continues to monitor the economic situation
throughout all primary geographic areas. Domestic growth was weaker than past
years and the Asian region experienced a 23% decline. Management anticipates
a continued weakness in the domestic economy for the near term and flat to
slightly reduced sales into Asia for fiscal 2000. Fiscal 2000 European growth
is expected to continue but at a lower level than in fiscal 1999.
Net interest expense of $3.2 million increased $291,000 (10%) in fiscal
1999 compared to 1998. This increase resulted from higher debt levels
associated with a $3.3 million stock repurchase program and inventory and
capital asset additions related to "Fresher Under Pressure" of approximately
$7.7 million. During fiscal 1999, other expense, net, totaled $587,000
compared to other expense, net, of $417,000 in fiscal 1998.
Fiscal 1999 income tax expense was 28% of income before tax as compared
to 29% in the previous year. The income tax rates were lower than the
statutory rates 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 valuation allowance.
The weighted average number of shares outstanding used for the
calculation of Basic and Diluted earnings per share is 14,730,000 and
15,059,000, respectively, for fiscal 1999 and 14,707,000 and 15,037,000,
respectively, for fiscal 1998.
The Company recorded fiscal 1999 net income of $6.7 million, or $.46
Basic and $.45 Diluted earnings per share as compared to $7.1 million, or
$.48 Basic and $.47 Diluted earnings per share in fiscal 1998. The Company's
pretax investment in "Fresher Under Pressure" in marketing, research and
engineering and the carrying costs of inventory and fixed assets was $2.5
million in fiscal 1999. Excluding the effects of "Fresher Under Pressure"
spending, fiscal 1999 net income would have been $8.5 million or $.58 Basic
and $.57 Diluted earnings per share.
FISCAL 1998 COMPARED TO FISCAL 1997
During fiscal 1998 the Company sold its non-core Access and Services
operations. Fiscal 1998 results included these operations only during the
first quarter, while fiscal 1997 included these operations for the entire
year. The Access and Services business units accounted for approximately 11%
and 33% of fiscal 1998 and 1997 revenues, respectively.
The following pro forma table separates the Company's Consolidated
Income Statement into the ongoing operations (UHP) and the divested
operations (Access and Services). The Company recorded a total of $13.9
million in restructuring charges during fiscal 1998 and 1997 to write down
the Access and Services assets sold to net realizable value and provide for
transaction expenses and probable future obligations associated with the
sale. These charges are
18
included as a separate component of operating expenses in the accompanying
Consolidated Statements of Income, and are included in the Access and
Services results below:
(In thousands) Year Ended April 30, 1998 Year Ended April 30, 1997
------------------------------------------ -----------------------------------------
Access & Access &
UHP Services Consolidated UHP Services Consolidated
------------------------------------------ -----------------------------------------
Revenue $ 142,632 $ 16,850 $ 159,482 $ 112,432 $ 55,761 $ 168,193
Gross profit 58,958 5,247 64,205 46,635 19,516 66,151
Operating expenses 45,593 8,427 54,020 37,431 23,874 61,305
Operating income / (loss) 13,365 (3,180) 10,185 9,204 (4,358) 4,846
Interest / other exp., net (3,303) (377) (3,680) (2,918) (965) (3,883)
Pretax income / (loss) 10,062 (3,557) 6,505 6,286 (5,323) 963
Given the disposition of Access and Services, two separate Results of Operations
reviews have been provided. The "UHP RESULTS OF OPERATIONS ANALYSIS" provides a
review of the UHP operations for fiscal 1998 as compared to 1997 and the "ACCESS
AND SERVICES OPERATIONS ANALYSIS" is a review of the results of operations for
Access and Services for fiscal 1998 as compared to 1997.
UHP RESULTS OF OPERATIONS ANALYSIS
The following analysis is a year over year comparison of the ongoing UHP
operations. The following pro forma table presents the results of operations of
the Company's UHP business only:
(In thousands) Year ended
April 30,
------------------------
1998 1997
------------------------
Revenue $ 142,632 $ 112,432
Gross profit 58,958 46,635
Operating expenses:
Marketing 21,952 18,924
Research and engineering 9,990 7,706
General and administrative 13,651 10,801
--------- ---------
45,593 37,431
--------- ---------
Operating income 13,365 9,204
Interest expense, net (2,886) (2,248)
Other expense, net (417) (670)
--------- ---------
Pretax income 10,062 6,286
Net income $ 7,144 $ 4,732
19
Revenues for the year ended April 30, 1998 were $142.6 million, an
increase of $30.2 million (27%) over the prior year period. Systems sales in
fiscal 1998 were $94.7 million, an increase of $23.1 million (32%) over the
prior year. The Company's standard systems, the Flying Bridge, the Bengal and
the A-series, represent the majority of the increase in systems sales.
Consumable parts and services revenues increased $7.1 million (17%) to $47.9
million in fiscal 1998. Revenues grew in all three primary geographic
markets, the Americas, Europe and Asia, with increases of 27%, 25% and 29%,
respectively, over the prior year. The Company did not significantly raise
prices during fiscal 1998.
The gross margin rate was 41% in both fiscal 1998 and 1997. The gross
margin rate is dependent on the mix of sales between systems and consumables.
Systems sales represented 66% of fiscal 1998 revenues, up from 64% in the
prior year and consumables sales represented 34% of fiscal 1998 revenues,
down from 36% in the prior year. The gross margin rate remained constant in
fiscal 1998 versus 1997 even with the continuing shift in revenue mix towards
systems versus consumables sales. This reflects, in part, the benefit of
lower costs on the standard product line as a result of increased production
levels.
Operating expenses of $45.6 million increased $8.2 million (22%) over
the prior year, however expressed as a percentage of revenues, operating
expenses decreased to 32% from 33% in fiscal 1997. Marketing expense of $22
million increased $3 million (16%) as compared to the prior year; however,
expressed as a percentage of revenues, marketing expense decreased to 15%
from 17% in the prior year. This reduction reflected management's ability to
leverage marketing activities against a higher revenue base. Research and
engineering expense in fiscal 1998 increased $2.3 million (30%) to $10
million as compared to fiscal 1997. This increased spending included
continued development of the "Fresher Under Pressure" technology as well as
research in other areas of the Company's products and applications.
Management will continue to aggressively pursue technological advances
through increased research and engineering spending. As a percentage of
revenues however, research and engineering expenses were 7% in both fiscal
1998 and 1997. General and administrative expense of $13.7 million increased
$2.9 million (26%) for the year as compared to the prior year. Over one half
of this increase is attributable to the inclusion of the fiscal 1998
acquisitions of Foracon and CIS. Expressed as a percentage of revenues,
general and administrative expenses were comparable to the prior year.
Operating income can vary significantly for domestic and foreign
operations, but is primarily the result of product mix variations and volume
from year to year.
Net interest expense of $2.9 million increased $638,000 (28%) in fiscal
1998 compared to 1997. This increase results from higher debt levels
associated with an increased level of production and capital additions as
well as borrowings related to the fiscal 1998 acquisitions. During fiscal
1998, other expense, net, totaled $417,000 compared to other expense, net, of
$670,000 in 1997.
20
Fiscal 1998 income tax expense was 29% of income before tax as compared
to 25% in the previous year. The income tax rates were lower than the
statutory rates 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 valuation allowance.
The weighted average number of shares outstanding used for the
calculation of Basic and Diluted earnings per share is 14,707,000 and
15,037,000, respectively, for fiscal 1998 and 14,561,000 and 14,932,000,
respectively, for fiscal 1997.
The Company recorded fiscal 1998 UHP net income of $7.1 million, or $.48
Basic and $.47 Diluted earnings per share as compared to $4.7 million, or
$.33 Basic and $.32 Diluted earnings per share in fiscal 1997.
ACCESS AND SERVICES OPERATIONS ANALYSIS
The following pro forma table presents the results of operations of the
Access and Services business units, including the restructuring charges:
(In thousands) Year ended
April 30,
------------------------
1998 1997
---------- ---------
Revenue $ 16,850 $ 55,761
Gross profit 5,247 19,516
Operating expenses 8,427 23,874
Operating loss (3,180) (4,358)
Interest / other expense, net (377) (965)
Pretax loss (3,557) (5,323)
The differences between fiscal 1998 and 1997 occurred as a result of the
sale of these businesses during fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $2.9 million in cash flow from operations during
fiscal 1999 as compared to $2.7 million in fiscal 1998. Cash flow in fiscal
1999 was impacted by increases in both trade accounts receivable and
inventory as discussed further below as well as reductions in accrued
liabilities. The Company invested $8.2 million in property and equipment
during fiscal 1999 of which $3.2 million related to "Fresher Under Pressure".
Additionally, the Company paid $13.6 million net of cash acquired for
Pressure Systems and spent $3.3 million to repurchase Company common stock.
Total debt at April 30, 1999 was $69.2 million, an increase of $30.2 million
(78%) from April 30, 1998. Management 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 12 months. The Company's Credit Agreement and Private Placement require
the Company to comply with certain financial covenants. The
21
covenants were amended as a result of the Pressure Systems acquisition. As of
April 30, 1999, the Company was in compliance with all such covenants, as
amended. The fiscal 1998 Consolidated Statement of Cash Flows reflects the
disposition of the Access and Services businesses.
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 $4
million to $8 million in fiscal 2000. Of this amount, approximately $2
million to $5 million relates to manufacture of the continuous feed "Fresher
Under Pressure" assets. The timing of these continuous feed asset additions
will be determined by market demand. It is expected that funds necessary for
these expenditures will be generated internally, and through available credit
facilities.
Gross trade accounts receivable of $56.5 million at April 30, 1999
increased $18.5 million (49%) from April 30, 1998. The April 30, 1999 amount
includes the March 1999 acquisition of Pressure Systems. Exclusive of the
acquisition, gross accounts receivable were flat compared to April 30, 1998.
Days' sales outstanding in gross accounts receivable is negatively impacted
by the traditionally longer payment cycle outside the United States.
Additionally, longer payment terms are sometimes negotiated on large system
orders. Management does not believe these timing issues will present a
material adverse impact on the Company's short-term liquidity requirements.
Inventory of $47.8 million at April 30, 1999 represents an increase of
$10.8 million (29%) compared to April 30, 1998. Excluding the March 1999
Pressure Systems acquisition, inventories increased $7.8 million (21%)
compared to April 30, 1998. Approximately $5 million of this increase is
inventory for the continuous feed "Fresher Under Pressure" technology.
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.
Quantitative and Qualitative Disclosures About Market Risk:
Market risk exists in the Company's financial instruments related to an
increase in interest rates as well as adverse changes in foreign exchange
rates relative to the U.S. dollar. These exposures are related to the daily
operations of the Company.
Interest Rate Exposure - At April 30, 1999 the Company had $69.2 million
in interest bearing debt. Of this amount $21.3 million was fixed rate debt
with interest rates ranging from 4.75% to 7.2% per annum. The remaining debt
of $47.9 million was variable with $40.5 million of this total bearing a rate
of LIBOR + 1% or 5.94% at April 30, 1999. The majority of the remaining
floating rate debt was at prime, 7.75%. See Note 8 to the Consolidated
Financial Statements for additional contractual information on the Company's
debt obligations. At April
22
30, 1999 the fair value of the Company's debt approximates the carrying
amount on the Consolidated Balance Sheet. Market risk is estimated as the
potential for interest rates to increase 10% on the variable rate debt. A 10%
increase in interest rates would result in an approximate additional annual
charge to the Company's pretax profits and cash flow of $275,000. At April
30, 1999 the Company had no derivative instruments to offset the risk of
interest rate changes. The Company may choose to use derivative instruments,
such as interest rate swaps, to manage the risk associated with interest rate
changes.
Foreign Currency Exchange Rate Risk - The Company transacts business in
various foreign currencies, primarily the Canadian dollar, the German mark,
the Japanese yen, the New Taiwan dollar, and the Swedish crown. The assets
and liabilities of its foreign operations, with functional currencies other
than the U.S. dollar, are translated into U.S. dollars at exchange rates in
effect at the balance sheet date. Income and expense items are translated at
the average exchange rates prevailing during the period. Aggregate
transaction gains and losses included in the determination of net income have
not been material. Based on the Company's overall currency rate exposure at
April 30, 1999, a near-term 10% appreciation or depreciation of the U.S.
dollar would have an insignificant effect on the Company's financial
position, results of operations and cash flows over the next fiscal year. At
April 30, 1998, a near-term 10% appreciation or depreciation of the U.S.
dollar was also determined to have an insignificant effect.
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 $250,000 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
that 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
23
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.
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 as 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 affect 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. In addition, the Company has met in person with the Company's
primary suppliers to review year 2000 readiness. The Company is in the
process of evaluating 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'.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131 ("FAS 131"),
"Disclosures about Segments of an Enterprise and Related Information" is
effective beginning in fiscal 1999. FAS 131 requires the Company to report
information about operating segments both annually as well as condensed data
quarterly. Operating segments are determined based upon the manner in which
internal financial information is produced and evaluated. Additionally
certain
24
geographical information is required regardless of how internal financial
information is generated. Based on the reporting structure of the Company,
management believes the Company operates within geographic segments only and
has adopted FAS 131 accordingly.
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. The Company has not made a decision regarding the period of
adoption.
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use", is effective
beginning in fiscal 2000. SOP 98-1 requires companies to capitalize the cost
of computer software developed or obtained for internal use. The adoption of
SOP 98-1 is not expected to have a material impact on the Company.
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-up Activities", is effective beginning in fiscal 2000. SOP 98-5
requires companies to expense costs associated with start-up operations,
including costs previously deferred. The adoption of SOP 98-5 is not expected
to have a material impact on the Company.
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 PricewaterhouseCoopers 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, Treasurer
and Chief Financial Officer
- --------------------------------------------------------------------------------
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The following consolidated financial statements are filed as a part of
this report:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE IN THIS REPORT
- -----------------------------------------------------------------------------------------
Report of Independent Accountants 27
Consolidated Balance Sheets at April 30, 1999 and 1998 28
Consolidated Statements of Income for each of the three
years in the period ended April 30, 1999 29
Consolidated Statements of Cash Flows for each of
the three years in the period ended April 30, 1999 30
Consolidated Statements of Stockholders'
Equity for each of the three years in the period
ended April 30, 1999 32
Notes to Consolidated Financial Statements 33
FINANCIAL STATEMENT SCHEDULES
Schedule VIII Valuation and Qualifying Accounts 51
All other schedules are omitted because they are not applicable.
26
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,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended April 30, 1999, in conformity
with generally accepted accounting principles. In addition, in our opinnion,
the financial statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. 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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
June 3, 1999
27
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
April 30,
-------------------------
1999 1998
---------- ----------
ASSETS:
Current Assets:
Cash $10,403 $3,006
Trade Accounts Receivable, less
allowances for doubtful accounts of $766 and $669, respectively 55,783 37,359
Inventories, net 47,771 36,976
Deferred Income Taxes 1,658 2,493
Other Current Assets 4,849 7,846
-------------------------
Total Current Assets 120,464 87,680
Property and Equipment, net 17,723 11,992
Intangible Assets, net of accumulated amortization of
$7,000 and $5,546, respectively 36,211 16,561
Deferred Income Taxes 1,314 1,562
Other Assets 3,440 3,386
-------------------------
$179,152 $121,181
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes Payable $ 419 $1,450
Current Portion of Long-Term Obligations 4,185 5,455
Accounts Payable 18,411 11,338
Accrued Payroll and Related Liabilities 6,801 5,428
Other Accrued Taxes 851 374
Deferred Revenue 2,888 102
Other Accrued Liabilities 6,916 3,670
-------------------------
Total Current Liabilities 40,471 27,817
Long-Term Obligations 64,614 32,076
Customer Deposits 8,931
Commitments and Contingencies (Note 13)
Minority Interest 1,114 93
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,
14,665,700 shares outstanding at April 30, 1999
14,846,908 shares outstanding at April 30, 1998 147 148
Capital in Excess of Par 40,260 39,925
Retained Earnings 28,037 23,749
Cumulative Translation Adjustment (3,882) (2,286)
Unrealized loss on equity securities available for sale (540) (341)
-------------------------
Total Stockholders' Equity 64,022 61,195
-------------------------
$179,152 $121,181
-------------------------
-------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
28
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
YEAR ENDED APRIL 30,
---------------------------------------
1999 1998 * 1997
--------- ---------- ---------
Revenue:
Sales $ 148,202 $ 149,414 $ 135,908
Services - 6,423 19,515
Rentals - 3,645 12,770
---------------------------------------
Total Revenues 148,202 159,482 168,193
---------------------------------------
Cost of Sales:
Sales 82,971 88,291 80,735
Services - 5,887 14,657
Rentals - 1,099 6,650
---------------------------------------
Total Cost of Sales 82,971 95,277 102,042
---------------------------------------
Gross Profit 65,231 64,205 66,151
---------------------------------------
Expenses:
Marketing 24,847 23,972 27,173
Research and Engineering 12,396 10,253 8,749
General and Administrative 14,888 14,885 16,432
Restructuring - 4,910 8,951
---------------------------------------
52,131 54,020 61,305
---------------------------------------
Operating Income 13,100 10,185 4,846
Interest Expense, net (3,177) (3,246) (3,837)
Other Expense, net (587) (434) (46)
---------------------------------------
Income Before Provision for Income Taxes 9,336 6,505 963
Provision for Income Taxes 2,614 1,702 238
---------------------------------------
Net Income $ 6,722 $ 4,803 $ 725
---------------------------------------
---------------------------------------
Basic Earnings Per Share $ .46 $ .33 $ .05
---------------------------------------
---------------------------------------
Diluted Earnings Per Share $ .45 $ .32 $ .05
---------------------------------------
---------------------------------------
* SEE NOTE 4 WHICH DESCRIBES THE DISPOSITION OF CERTAIN BUSINESS UNITS DURING
FISCAL 1998
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
29
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended April 30,
----------------------------------------
1999 1998 * 1997
----- ------ ----
Cash Flows from Operating Activities:
Net Income $ 6,722 $ 4,803 $ 725
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation and Amortization 4,882 4,369 7,472
Restructuring provision 4,910 8,951
Provision for losses on trade accounts receivable 373 508 704
Tax effect of exercised stock options 218 373 284
Other 92
(Increase) Decrease in Operating Assets and Liabilities,
net of effects of business combinations and restructuring:
Trade Accounts Receivable (4,201) (13,007) (5,960)
Inventories (4,707) (2,377) (3,946)
Other Current Assets 3,798 (3,078) (46)
Deferred Income Taxes 835 2,265 (2,793)
Accounts Payable 4,423 2,009 (469)
Accrued Payroll and Related Liabilities 1,168 1,562 622
Other Accrued Taxes 20 (515) 549
Deferred Revenue 2,684 102
Other Accrued Liabilities (14,586) (31) (878)
Other Long-Term Assets 188 778 (1,165)
Other Long-Term Liabilities 1,065 38 (484)
-------- -------- --------
Cash provided by operating activities 2,882 2,709 3,658
-------- -------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment (8,200) (6,600) (9,153)
Investment in equity securities (1,500)
Payment for business combinations, net of cash acquired (13,564) (7,735)
Proceeds from sale of certain business units 31,189
Other (44) (186) 462
-------- -------- --------
Cash (used) provided by investing activities (21,808) 16,668 (10,191)
-------- -------- --------
Cash Flows from Financing Activities:
Borrowings under line of credit agreements, net 33,594 (24,512) 8,585
Proceeds from long-term obligations 8,544 184
Payments of long-term obligations (3,357) (1,389) (2,399)
Proceeds from issuance of common stock 948 1,789 550
Common stock repurchased (3,266) - (873)
-------- -------- --------
Cash provided (used) by financing activities 27,919 (15,568) 6,047
-------- -------- --------
Effect of exchange rate changes (1,596) (3,282) (880)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 7,397 527 (1,366)
Cash and cash equivalents at beginning of period 3,006 2,479 3,845
-------- -------- --------
Cash and cash equivalents at end of period $ 10,403 $ 3,006 $ 2,479
-------- -------- --------
-------- -------- --------
* SEE NOTE 4 WHICH DESCRIBES THE DISPOSITION OF CERTAIN BUSINESS UNITS DURING
FISCAL 1998
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
30
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year Ended April 30,
------------------------------------
1999 1998 1997
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 3,175 $ 3,504 $ 3,707
Income Taxes 569 1,656 2,091
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value of assets acquired (Note 2) $ 43,703 $ 10,144
Net Cash paid, stock issued and notes assumed for assets acquired (13,564) (7,466)
-------- --------
Liabilities assumed $ 30,139 $ 2,678
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
31
FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Loan to
Employee
Common Stock Stock Unrealized
------------------- Capital Cumulative Ownership Loss On Total
Par In Excess Retained Translation Plan and Equity stockholder's
Shares Value of Par Earnings Adjustment Trust Securities equity
-----------------------------------------------------------------------------------------
Balances, April 30, 1996 14,510 $145 $37,359 $18,667 $981 $(92) $57,060
Components of Comprehensive Income:
Net Income 725 725
Unrealized Loss on Equity Securities
Available for Sale, Net of Tax (205) (205)
Cumulative Translation Adjustment (880) (880)
-----------
Total Comprehensive Loss (360)
-----------
Exercise of Stock Options 141 1 549 550
Repurchase of Common Stock (67) (1) (164) (333) (498)
Other (39) 22 (113) 92 1
-----------------------------------------------------------------------------------------
Balances, April 30, 1997 14,545 145 37,766 18,946 101 - (205) 56,753
Components of Comprehensive Income:
Net Income 4,803 4,803
Unrealized Loss on Equity Securities
Available for Sale, Net of Tax (136) (136)
Cumulative Translation Adjustment (2,387) (2,387)
-----------
Total Comprehensive Income 2,280
-----------
Exercise of Stock Options 302 3 1,786 1,789
Other 373 373
-----------------------------------------------------------------------------------------
Balances, April 30, 1998 14,847 148 39,925 23,749 (2,286) - (341) 61,195
Components of Comprehensive Income:
Net Income 6,722 6,722
Unrealized Loss on Equity Securities
Available for Sale, Net of Tax (199) (199)
Cumulative Translation Adjustment (1,596) (1,596)
-----------
Total Comprehensive Income 4,927
-----------
Exercise of Stock Options 155 2 946 948
Repurchase of Common Stock (336) (3) (829) (2,434) (3,266)
Other 218 218
-----------------------------------------------------------------------------------------
Balances, April 30, 1999 14,666 $147 $40,260 $28,037 $(3,882) - $(540) $64,022
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three years ended April 30, 1999
(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"), Foracon Maschinen und Anlagenbau GmbH &
CO.KG ("Foracon"), Flow Asia Corporation ("Flow Asia"), Flow Automation Inc.
("Flow Automation"), Flow Software Technologies Ltd. ("Flow Software"), Flow
Pressure Systems Vasteras AB ("Pressure Systems"), Flow Holdings GmbH (SAGL)
Limited Liability Company ("Flow Switzerland"), and three joint ventures,
Flow Autoclave Inc. ("Flow Autoclave"), a 50% owned joint venture and two
majority owned joint ventures including Flow Japan Corporation ("Flow
Japan"). In addition, periods through the first quarter of fiscal 1998
included the wholly-owned subsidiaries Rampart Waterblast, Inc., Spider
Staging Corporation ("Spider"), Power Climber and affiliated companies
("Power Climber") as well as a joint venture, Consortium Europeen du Materiel
("CEM") and the HydroMilling division, collectively ("Access and Services")
(see Note 4). All significant intercompany transactions have been eliminated.
OPERATIONS
The Company develops and manufactures ultrahigh-pressure ("UHP")
waterjet cutting, cleaning and specialized robotic systems for the
manufacturing, industrial and marine cleaning markets. The Company provides
products to a wide variety of industries, including the automotive,
aerospace, disposable products, food processing, job shop, marble, tile and
other stone cutting, and paper industries. In addition, the Company provides
isostatic presses to the automotive and aerospace industry and UHP processing
equipment for food. Equipment is designed, developed, and manufactured at the
Company's principal facilities in Kent, Washington, and at manufacturing
facilities in Bretton and Darmstadt Germany, Burlington, Canada, Hsinchu
Taiwan, Jeffersonville, Indiana, and Vasteras, Sweden. The Company markets
its products to customers worldwide through its principal offices in Kent and
its subsidiaries in Canada, Germany, Japan, Sweden, Switzerland, Taiwan, and
the United Kingdom.
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
33
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
for machinery and equipment; three to nine years for furniture and fixtures
and 19 years for buildings. Leasehold improvements are amortized over the
related lease term.
RECOVERABILITY 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 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.
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.
34
If it is more likely than not that some portion of a deferred tax asset will
not be realized, a valuation allowance is recorded.
TREASURY STOCK
During fiscal 1999, the Company changed incorporation from Delaware to
Washington State. Under Washington State law, Treasury Stock is not
recognized. Accordingly, the Company retired all Treasury Stock during fiscal
1999 and the financial statements reflect this change in all periods
presented.
BASIC AND DILUTED EARNINGS PER SHARE
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.
Common stock options are converted using the treasury stock method.
The following table sets forth the computation of Basic and Diluted
earnings per share for the years ended April 30, 1999, 1998 and 1997.
Year Ended April 30,
1999 1998 1997
---------------------------------
Numerator:
Net income $ 6,722 $ 4,803 $ 725
Denominator:
Denominator for basic earnings
per share - weighted average shares 14,730 14,707 14,561
Dilutive potential common shares from
employee stock options 329 330 371
----------------------------------
Denominator for diluted earnings
per share - weighted average shares
and assumed conversions 15,059 15,037 14,932
Basic earnings per share $ .46 $ .33 $ .05
Diluted earnings per share $ .45 $ .32 $ .05
35
INTANGIBLE ASSETS
Intangible assets consisting primarily of acquired technology, patents
and goodwill are amortized on a straight-line basis over fifteen years.
FOREIGN CURRENCY TRANSLATION
The functional currency of Flow Asia is the New Taiwan dollar; of Flow
Automation, the Canadian dollar; of Flow Europe and Foracon, the German mark;
of Flow Japan, the Japanese yen; of Power Climber N.V. (part of Power
Climber), the Belgian franc, and of Pressure Systems, the Swedish crown.. The
functional currency of Flow Europe was converted from the U.S. dollar to the
German mark as of the beginning of fiscal 1998. The acquisition of Foracon by
Flow Europe in May 1997 made this change preferable. All assets and
liabilities of these foreign subsidiaries are translated at year-end rates.
Income and expense accounts of the foreign subsidiaries are translated at the
average rates in effect during the year. Adjustments resulting from the
translation of Flow Asia, Flow Automation, Flow Europe, Foracon, Flow Japan,
Power Climber N.V., and Pressure Systems financial statements are recorded in
the cumulative translation adjustment account in the stockholders' equity
section of the accompanying Consolidated Balance Sheets.
At times 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 no forward exchange contracts at April 30, 1999 or 1998. For
the years ended April 30, 1999, 1998 and 1997 a net foreign exchange loss of
$104,000, $75,000 and $590,000, respectively, is included in Other Expense,
net, in the accompanying Consolidated Statements of Income.
CASH EQUIVALENTS
For the purposes of the Consolidated Statements of Cash Flows, the
Company considers short-term investments with original or remaining
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.
36
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments on the balance sheet as of April 30, 1999 and
1998 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 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 Expense, net in the accompanying
Consolidated Statements of Income.
RECLASSIFICATIONS
Certain 1998 and 1997 amounts have been reclassified to conform with the 1999
presentation. These reclassifications had no effect on previously reported
net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131 ("FAS 131"),
"Disclosures about Segments of an Enterprise and Related Information" is
effective beginning in fiscal 1999. FAS 131 requires the Company to report
information about operating segments both annually as well as condensed data
quarterly. Operating segments are determined based upon the manner in which
internal financial information is produced and evaluated. Additionally
certain geographical information is required regardless of how internal
financial information is generated. Based on the reporting structure of the
Company, management believes the Company operates within geographic segments
only and has adopted FAS 131 accordingly.
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
37
assessing its impact on the Company's financial statements. The Company has
not made a decision regarding the period of adoption.
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use", is effective
beginning in fiscal 2000. SOP 98-1 requires companies to capitalize the cost
of computer software developed or obtained for internal use. The adoption of
SOP 98-1 is not expected to have a material impact on the Company.
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-up Activities", is effective beginning in fiscal 2000. SOP 98-5
requires companies to expense costs associated with start-up operations,
including cost previously deferred. The adoption of SOP 98-5 is not expected
to have a material impact on the Company.
NOTE 2 - BUSINESS COMBINATIONS:
- --------------------------------------------------------------------------------
In March 1999 the Company acquired all of the stock of Pressure Systems
from Asea Brown Boveri AB ("ABB"). In addition the Company purchased a 50%
ownership in Flow Autoclave from an ABB subsidiary. Pressure Systems
manufactures pressure vessels used in batch UHP food processing, a
complementary product to the Company's continuous flow food processing
technology, as well as isostatic and flex forming presses for the aerospace
and automotive industry. Flow Autoclave is the domestic distributor for the
Pressure Systems product. Total cash consideration for the above two
acquisitions was $22.8 million. The difference between the net fair market
value of assets acquired and consideration given totaled $21.1 million and
has been recorded as an intangible. Operating results have been included in
the Consolidated Financial Statements from the date of acquisition based upon
the purchase method of accounting.
In May 1997 the Company purchased the stock of Foracon. Foracon supplies
UHP and related systems to the European market. In April 1998 the Company
purchased substantially all the assets and selected liabilities of CIS
Robotics Inc. and the stock of Flow Software. These companies develop
software used to program industrial robots as well as provide, as a service,
industrial robot programming.
Total cash consideration for the above two acquisitions was $6.9
million. The difference between the net fair market value of assets acquired
and consideration given totaled $6.3 million and has been recorded as an
intangible. Results have been included in the Consolidated Financial
Statements from the date of acquisition based upon the purchase method of
accounting. Unaudited pro forma results are not presented as they are not
materially different from the results reported in the Consolidated Financial
Statements.
During fiscal 1998 the Company invested an additional $800,000 to
increase its ownership in two joint ventures, Flow Japan and HydroDynamic
Cutting Services.
38
NOTE 3 - PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
- --------------------------------------------------------------------------------
Pressure Systems was a small subsidiary of ABB. Consistent with ABB
policy, Pressure Systems was subject to various intercompany charges, many of
which will not be recurring in the future. These charges are included in the
pro forma financial information below.
If Pressure Systems had been acquired at the beginning of the years
ended April 30, 1999 and 1998, the results of operations of the Company would
be adjusted as follows on a pro forma basis. Total revenues would have been
$170.3 million and $189.8 million for the years ended April 30, 1999 and
1998, respectively. Net income for the years ended April 30, 1999 and 1998
would have been $4.8 million and $1.5 million, respectively, Basic earnings
per share would have been $.33 and $.10, respectively, and Diluted earnings
per share would have been $.32 and $.10, respectively. The adjustments to net
income for the years ended April 30, 1999 and 1998 include additional
interest expense of $1.1 million and $1.2 million, respectively, and
additional goodwill amortization of $1.3 million and $1.4 million,
respectively. The pro forma consolidated financial information is presented
for information purposes only, does not take into account savings that may
have been realized from the combination of the Company and Pressure Systems,
and is not indicative of the actual consolidated financial position or
results of operations in the future. Pressure Systems utilized the completed
contract method of revenue recognition during the year ended April 30, 1998
and through the second quarter of the year ended April 30, 1999.
NOTE 4 - BUSINESS DIVESTITURE:
- --------------------------------------------------------------------------------
During the second quarter of fiscal 1998 the Company sold its Access and
Services operations. The Company recorded a $4.9 million restructuring
provision during fiscal 1998 associated with this sale. The primary
components of this expense were: write down of assets to net realizable
value, $4 million; probable future obligations associated with the sale,
$900,000. In addition, during fiscal 1997 the Company recorded a $9 million
restructuring provision associated with the then proposed divestiture. The
primary components of this expense were: 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,
$300,000. These charges are included as a separate component of operating
expenses in the accompanying Consolidated Statements of Income.
At April 30, 1998 the Company had $860,000 in asset valuation guarantee
reserves related to the sale. During the year ended April 30, 1999 the
Company utilized the reserve for $860,000 with no other adjustment to the
reserve during the year.
39
The following table summarizes the operating results of the Access and
Services operations, excluding the restructuring provisions, for the year
ended April 30:
1998 1997
---- ----
Revenue $16,850 $55,761
Gross Profit 5,427 19,516
Operating Income 1,730 4,593
Pretax Income 1,353 3,628
NOTE 5 - RELATED PARTY TRANSACTIONS:
- --------------------------------------------------------------------------------
In August 1992, the Company entered into a stock purchase agreement with
Phenix and contributed cash and certain equipment valued at cost. The book
value of the investment is $484,000 at April 30, 1999 and 1998 and is being
accounted for under the cost method. 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 publicly traded on the Toronto stock exchange. This
investment was made to secure a long-term relationship with the Company's
supplier of its high quality garnet. Garnet is sold by the Company as a
consumable used in abrasivejet cutting. The Company classifies this
investment as available-for-sale under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Based on the April 30, 1999 closing stock price of Western
Garnet, the Company recorded a tax-affected unrealized loss of $540,000 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,
1999 1998
---------------------
Raw Materials and Parts $29,090 $23,617
Work in Process 11,223 9,312
Finished Goods 9,772 6,574
---------------------
50,085 39,503
Less: Provisions for Slow-Moving
and Obsolete Inventory 2,314 2,527
---------------------
$47,771 $36,976
---------------------
---------------------
40
NOTE 7 - PROPERTY AND EQUIPMENT:
- --------------------------------------------------------------------------------
Property and equipment are as follows:
April 30,
1999 1998
---------------------
Land and Buildings $ 461 $ 461
Machinery and Equipment 25,845 23,674
Furniture and Fixtures 2,646 2,323
Leasehold Improvements 8,588 6,902
Construction in Progress 3,620 261
---------------------
41,160 33,621
Less:
Accumulated Depreciation and Amortization 23,437 21,629
---------------------
$17,723 $11,992
---------------------
---------------------
NOTE 8 - LONG-TERM OBLIGATIONS AND NOTES PAYABLE:
- --------------------------------------------------------------------------------
Long-term obligations are as follows:
April 30,
1999 1998
---------------------
Flow Line of Credit $44,070 $12,414
Private Debt Placement 15,000 15,000
Term Loans Payable 9,729 10,117
---------------------
68,799 37,531
Less: Current Portion 4,185 5,455
---------------------
$64,614 $32,076
---------------------
---------------------
Current notes payable are as follows:
April 30,
1999 1998
---------------------
Flow Japan Notes Payable $ 419 $ 756
Flow Automation Notes Payable 430
Other Notes Payable 264
---------------------
$ 419 $ 1,450
---------------------
---------------------
In August 1998 the Company renegoiated its Credit Agreement. The
Company's Credit Agreement provides for a revolving line of credit of up to
$75 million, with two financial institutions, which expires on September 30,
2003. The amount that can be borrowed is limited based on 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
$44.1 million under the Credit Agreement as of April 30, 1999, of which $3.6
million carries an interest rate of prime and the remainder carries an
interest rate of LIBOR + 1%. Prime at April 30, 1999 was 7.75% and
41
LIBOR was 4.94%. The Company pays 0.1% as an unused commitment fee. As of
April 30, 1999, the Company had less than $1 million of available domestic
unused line of credit.
The Private Debt Placement is a 10-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 all of 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 in
conjunction with the acquisition of Pressure Systems. As of April 30, 1999,
the Company was in compliance with all such covenants, as amended.
Included in Term Loans Payable are the following:
A German mark denominated loan of $6.2 million. The Company's principal
bank has issued a $9.4 million standby letter of credit to the Company's
German bank, to secure a credit facility for use by Flow Europe. Principal
and interest is payable monthly at a rate of 4.6% through fiscal 2003. At
April 30, 1999, Flow Europe had an unused $3.2 million credit facility.
A secured Japanese yen denominated loan of $3.1 million. Principal and
interest is payable monthly at a range of 2.2% to 2.3% through fiscal 2003.
An unsecured $149,000 note to a previous owner of Power Climber in
conjunction with the acquisition of assets. The note requires monthly payment
of principal and interest, at 7.25%, through fiscal 2003.
Current notes payable include:
A 100 million Japanese yen 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 1.4% to 1.6% at
April 30, 1999. As of April 30, 1999 Flow Japan had an unused $419,000 credit
facility.
The Flow Automation credit facility is collateralized by trade accounts
receivable and inventory, and is denominated in Canadian dollars at an
interest rate of Canadian prime plus 1.25%. Flow Automation has approximately
$619,000 dollars in unused credit facilities at April 30, 1999.
Principal payments under long-term obligations for the next five years
and thereafter are as follows: $4,185,000 in 2000, $4,161,000 in 2001,
$4,161,000 in 2002, $2,648,000 in 2003, $49,355,000 in 2004, and $4,289,000
thereafter.
42
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,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
Income (Loss) Before Income Taxes:
Domestic $5,753 $3,237 $2,509
Foreign 3,583 3,268 (1,546)
---------- ---------- ----------
Total $9,336 $6,505 $ 963
---------- ---------- ----------
---------- ---------- ----------
The provision for income taxes comprises:
Year Ended April 30,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
Current Tax Expense (Benefit):
Domestic $ 443 $ (135) $ 1,952
State and Local 255 219 261
Foreign 589 400 476
---------- ---------- ----------
Total 1,287 484 2,689
Deferred Tax Expense (Benefit) 1,327 1,218 (2,451)
---------- ---------- ----------
Total Provision for Income Taxes $2,614 $1,702 $ 238
---------- ---------- ----------
---------- ---------- ----------
Net deferred tax assets (liabilities) comprise the following:
April 30, 1999 April 30, 1998
-------------- --------------
Fixed assets $ 469 $ 471
Obsolete inventory provisions 325 513
Restructuring charge 96 292
Net operating loss carryover 2,348 3,712
Subpart F income 369 228
Foreign taxes (747) (781)
Accounts receivable allowances 94 108
Inventory capitalization 94 92
AMT Credits 897 1,076
All other 415 192
--------- ---------
Subtotal 4,360 5,903
Valuation allowance (1,388) (1,848)
--------- ---------
Total Net Deferred Taxes $2,972 $4,055
--------- ---------
--------- ---------
43
A reconciliation of income taxes at the federal statutory rate to the
provision for income taxes is as follows:
Year Ended April 30,
-------------------------------------------------
1999 1998 1997
-------- --------- ---------
Income taxes at federal statutory rate $3,174 $2,212 $327
Foreign sales corporation benefit (244) (327) (228)
Foreign operations expense (36) 199 (199)
Change in valuation allowances (460) (651) 92
State and local taxes 168 144 261
Other 12 125 (15)
-------- --------- ---------
Income tax provision $2,614 $1,702 $ 238
-------- --------- ---------
-------- --------- ---------
As of May 1, 1999, the Company had approximately $3 million of domestic
net operating loss carryforwards to offset certain Flow earnings for federal
income tax purposes. Of the $3 million carryforward, approximately $2 million
was currently available. An additional $943,000 becomes available in fiscal
year 2000 with the remaining becoming available the following year. These net
operating loss carryforwards expire in varying amounts through the year 2003.
Due to current and expected future earnings, the Company expects
increased utilization of its foreign net operating loss carryforwards of $3.2
million. Therefore, the foreign valuation allowance was reduced by a net tax
affected amount of $561,000 in fiscal 1999.
Provision has not been made for U.S. income taxes or foreign withholding
taxes on $7.6 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 loaned 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 - STOCK OPTIONS:
- --------------------------------------------------------------------------------
The Company has stock options outstanding under various option plans
described as follows:
1984 RESTATED STOCK OPTION PLAN (THE "1984 RESTATED PLAN"). Approved by
the Company's stockholders 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.
44
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 10,000 options annually thereafter during the
term of directorship.
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
1,350,000 shares may be issued under this plan.
All options become exercisable upon a change in control of the Company.
Options have a two-year vesting schedule, and are granted with an exercise
price equal to the fair market value of the Company's Common Stock on the
date of grant. The maximum term of options is 10 years from the date of
grant. No compensation expense has been recorded in fiscal 1999, 1998 or
1997. The following chart summarizes the status of the options at April 30,
1999:
-----------------------------------------------------------
1991 SO
1984 1987 Plan
Restated Nonemployee and 1995
Plan Directors Plan LTI Plan Total
- ---------------------------------------------------------------------------------------------------
Number of options outstanding 181,600 380,000 1,508,194 2,069,794
Number of options vested 181,600 368,000 914,194 1,463,794
Average exercise price per share $2.66 $8.60 $8.63 $8.10
of options outstanding
- ---------------------------------------------------------------------------------------------------
The Company has adopted the disclosure only provisions of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock Based
Compensation". Pro forma information regarding the net income or loss as
calculated under FAS 123 has been determined as if the Company had accounted
for its employee stock options under the fair value method. If the Company
had elected to recognize compensation costs based on the fair value at the
date of grant for awards in fiscal 1999, 1998 and 1997, consistent with the
provisions of FAS 123, the Company's net income (loss) and earnings (loss)
per Basic and Diluted share would have been reduced to the following pro
forma amounts:
45
Year Ended April 30:
- -----------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
Income (Loss) from Continuing Operations:
As reported $6,722 $4,803 $725
Pro forma $5,034 $3,808 $(1,110)
Earnings (Loss) Per Share - Basic:
As reported $0.46 $0.33 $0.05
Pro forma $0.34 $0.26 $(0.08)
Earnings (Loss) Per Share - Diluted:
As reported $0.45 $0.32 $0.05
Pro forma $0.33 $0.25 $(0.08)
- -----------------------------------------------------------------------------------
Such pro forma disclosures may not be representative of future
compensation cost because options vest over several years and additional
grants are made each year.
The weighted-average fair values at the date of grant for options
granted in fiscal 1999, 1998 and 1997 were estimated using the Black-Scholes
option-pricing model, based on the following assumptions: (i) no expected
dividend yields for fiscal years 1999, 1998 and 1997; (ii) expected
volatility rates of 47.9%, 48.9% and 47.1% for fiscal 1999, 1998 and 1997,
respectively; and (iii) expected lives of 6 years for fiscal 1999, 1998 and
1997. The risk-free interest rate applied to fiscal 1999, 1998 and 1997 was
6.0%, 5.8% and 6.9%, respectively.
The following table summarizes information about stock options
outstanding at April 30, 1999:
-------------------------------------------------------------------------------------------
Range of Exercise Prices Number Weighted-Average Weighted-Average Number Weighted-Average
Outstanding at Remaining Exercise Exercisable at Exercise
April 30, 1999 Contractual Life Price April 30, 1999 Price
- ------------------------------------------------------------------------------------------------------------------------
$1.25 - $4.99 231,600 2.02 years $ 2.74 231,600 $ 2.74
$5.00 - $7.99 422,050 4.31 years 5.96 422,050 5.96
$8.00 - $12.25 1,416,144 7.36 years 9.61 810,144 9.46
- ------------------------------------------------------------------------------------------------------------------------
Total: 2,069,794 6.14 years $ 8.10 1,463,794 $ 7.39
- ------------------------------------------------------------------------------------------------------------------------
46
The following table rolls forward the stock option activity for the years
ended April 30:
----------------------------------------------------------------------------------------------
1999 1998 1997
Shares Weighted- Shares Weighted- Shares Weighted-
Average Average Average
Exercise Price Exercise Price Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year 1,903,593 $ 7.64 1,887,199 $ 6.92 1,498,825 $ 5.73
Granted during the year: 380,100 9.59 423,700 10.21 622,195 9.41
Exercised during the year: (155,242) 6.12 (301,648) 5.93 (140,980) 3.80
Forfeited during the year: (58,657) 8.07 (105,658) 9.19 (92,841) 9.31
--------- ------ --------- ------ --------- ------
Outstanding, end of year 2,069,794 $ 8.10 1,903,593 $ 7.64 1,887,199 $ 6.92
Exercisable, end of year 1,463,794 $ 7.39 1,231,552 $ 6.51 1,027,465 $ 5.52
Weighted Average fair value of $ 4.26 $ 4.37 $ 4.59
options granted during each period:
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE 11 - 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, 1999, 1998, and 1997 were
$753,000, $763,000, and $709,000, respectively.
In September 1989, the Company established an ESOP for all employees
meeting certain service requirements. During fiscal 1997 the ESOP loan was
repaid and the remaining ESOP stock was distributed. Compensation and interest
expense related to the ESOP of $108,000 was recorded during the year ended April
30, 1997. No such expense was incurred during fiscal 1999 or 1998. In March,
1998 the Company's Board of Directors approved termination of the ESOP.
NOTE 12 - PREFERRED SHARE RIGHTS PURCHASE PLAN:
- --------------------------------------------------------------------------------
The Board of Directors of the Company has 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
47
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 July 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. The Board of Directors has authorized certain changes to terms of
the Preferred Share Rights Purchase Plan to take effect after April 30, 1999.
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 $3.4 million, $3.4 million, and $3.7
million for the years ended April 30, 1999, 1998 and 1997, respectively.
Future minimum rents payable under operating leases for years ending April
30 are as follows:
Year Ending April 30,
---------------------
2000 $ 4,152
2001 2,508
2002 2,093
2003 1,313
2004 610
Thereafter 2,397
-------
$13,073
The Company has been subject to product liability claims primarily through
Spider, its former subsidiary that was sold in September 1997. 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.
48
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 that 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, 1999, aggregate from approximately $0
to $450,000.
Included in Other Expense, net, in the years ended April 30, 1999, 1998 and
1997 are settlements of approximately $299,000, $134,000, and $161,000,
respectively.
NOTE 14- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
- --------------------------------------------------------------------------------
Fiscal 1999 Quarters First Second Third Fourth Total
- -------------------- ----- ------ ----- ------ -----
Revenue $36,422 $38,383 $33,554 $39,843 $148,202
Gross Profit 15,835 16,928 15,585 16,883 65,231
Net Income 1,796 2,189 1,443 1,294 6,722
Earnings Per share:
Basic .12 .15 .10 .09 .46
Diluted * .12 .15 .10 .09 .45
Fiscal 1998 Quarters First Second Third Fourth Total
- -------------------- ----- ------ ----- ------ -----
Revenue $47,514 $35,162 $34,463 $42,343 $159,482
Gross Profit 18,060 14,686 14,467 16,992 64,205
Net Income (Loss) (949) 1,804 1,810 2,138 4,803
Earnings (Loss) Per share:
Basic * (.07) .12 .12 .14 .33
Diluted * (.07) .12 .12 .14 .32
* The total of the four quarters does not equal the year due to rounding.
49
NOTE 15- FOREIGN OPERATIONS:
- --------------------------------------------------------------------------------
UNITED OTHER ADJUSTMENTS &
STATES EUROPE ASIA FOREIGN ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Customers (1) $74,594 $42,414 $14,877 $16,317 $ - $148,202
Inter-area (2) 22,917 - 1,793 1,441 (26,151)
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $97,511 $42,414 $16,670 $17,758 $(26,151) $148,202
Long-Lived Assets $21,095 $26,120 $1,870 $8,855 $57,940
1998
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Customers (1) $86,561 $36,041 $18,807 $18,073 $ - $159,482
Inter-area (2) 16,772 - 3,053 - (19,825)
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $103,333 $36,041 $21,860 $18,073 $(19,825) $159,482
Long-Lived Assets $15,924 $5,155 $1,555 $9,471 $32,105
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
Long-Lived Assets $31,006 $6,038 $1,692 $8,291 $47,027
(1) U.S. sales to unaffiliated customers in foreign countries were $4,000,000,
$5,300,000 and $7,600,000 in fiscal 1999, 1998, and 1997, respectively.
(2) Inter-area sales to affiliates represent products that were transferred
between geographic areas at negotiated prices. These amounts have been
eliminated in the consolidation.
50
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
1999 $ 669 $373 $(22) $ (254) $ 766
1998 1,008 508 (377) (470) 669
1997 1,186 704 (882) 1,008
PROVISION FOR SLOW-MOVING AND OBSOLETE INVENTORY
1999 $2,527 $365 $328 $ (906) $2,314
1998 1,897 1,060 (224) (206) 2,527
1997 2,352 83 (538) 1,897
- ----------
* Write-offs of uncollectible accounts and disposal of obsolete inventory.
51
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.
52
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 -
Current Report on Form 8-K dated April 12, 1999.
(c) Exhibits.
53
EXHIBIT
NUMBER
3.1 Articles of Incorporation, filed with the state of Washington
October 1, 1998.
3.2 By-Laws of Flow International Corporation.
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 Trust
Agreement, 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.)
54
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,
Bank of America National Trust and Savings Association d/b/a SeaFirst
Bank and U.S. Bank, National Association, as lenders, and Bank of
America National Trust and Savings Association d/b/a SeaFirst Bank as
agent for lenders dated August 31, 1998.
10.15 Amendment Number One to Credit Agreement dated March 1999, between Flow
International Corporation and Bank of America National Trust and
Savings Association d/b/a SeaFirst Bank.
10.16 Amendment Number Two to Credit Agreement dated June 21, 1999 between
Flow International Corporation and U.S. Bank of Washington, N.A.
10.17 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.)
10.18 First amendment to Note Purchase Agreement dated July 16, 1997.
(Incorporated by reference to Exhibit 10.17 to the registrant's Annual
Report on Form 10-K for the year ended April 30, 1997.)
10.19 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.)
10.20 Amended and Restated Stock Purchase Agreement dated March 31, 1999
between Asea Brown Boveri AB and Gigantissimo 2131 AB, under change of
name to Flow International FPS AB. (Incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated April
12, 1999.)
10.21 Asset Purchase Agreement dated March 31, 1999 between Asea Brown Boveri
AB and Flow Holdings GmbH (SAGL) Limited Liability Company.
(Incorporated by reference to Exhibit 2.2 to the Registrant's Current
Report on Form 8-K dated April 12, 1999.)
10.22 Amended and Restated Stock Purchase Agreement dated March 31, 1999
among ABB Industrial Systems, Inc., Flow International Corporation, and
AGG Autoclave Systems Inc. (Incorporated by reference to Exhibit 2.3 to
the Registrant's Current Report on Form 8-K dated April 12, 1999.)
55
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
56
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, 1999
/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 22nd day of July, 1999
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
57
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
58