e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
April 30, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-12448
FLOW INTERNATIONAL
CORPORATION
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Washington
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91-1104842
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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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 if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o.
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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act.): Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant was approximately
$139,146,636 as of October 31, 2008, the last business day
of the registrants most recently completed second fiscal
quarter, based on a closing price of $3.84 per share as quoted
by the NASDAQ Stock Market as of such date. The determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
The registrant had 37,750,429 shares of Common Stock,
$0.01 par value per share, outstanding as of June 12,
2009.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement
pursuant to Regulation 14A within 120 days of the end
of the fiscal year ended April 30, 2009 (the 2010
Proxy Statement). Portions of such proxy statement are
incorporated by reference into Part II and III of this
Form 10-K.
With the exception of such portions of the 2010 Proxy Statement
expressly incorporated by into this Annual Report on
Form 10-K
by reference, such document shall not be deemed filed as part of
this Annual Report on
Form 10-K.
Forward-Looking
Statements
Forward-looking statements in this report, including without
limitation, statements relating to the Companys plans,
strategies, objectives, expectations, intentions, and adequacy
of resources, are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The words
may, expect, believe,
anticipate, estimate, plan
and similar expressions are intended to identify forward-looking
statements. These statements are no guarantee of future
performance and involve certain risks, assumptions, and
uncertainties that are difficult to predict. Therefore, actual
outcome and results may differ materially from what is expressed
or forecasted in such forward-looking statements.
We make forward-looking statements of our expectations which
include but are not limited to:
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statements regarding the successful execution of our
strategic initiatives;
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statements regarding our future business plans and growth
strategy;
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statements regarding our ability to respond to a decline in
the near-term demand for our products by cutting costs;
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statements regarding our belief that the diversity of our
markets, along with the relatively early adoption phase of our
technology, and the displacement of more traditional methods for
machining and fabricating, will enable us to absorb the economic
downturn with less impact than conventional machine tool
manufacturers;
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statements regarding the realization of backlog in the
Advanced segment;
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statements regarding the use of cash, cash needs and ability
to raise capital
and/or use
our credit facility;
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statements regarding our belief that our existing cash and
cash equivalents, along with the expected proceeds from our
operations will provide adequate liquidity to fund our
operations through at least the next twelve months;
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statements regarding our ability to meet our debt covenants
in future periods;
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statements regarding our technological leadership
position;
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statements regarding anticipated results of potential or
actual litigation;
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statements regarding our expectation that our unrecognized
tax benefits will not change significantly within the next
twelve months.
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There may be other factors not mentioned above or included in
our SEC filings that may cause our actual results to differ
materially from those in any forward-looking statement. You
should not place undue reliance on these forward-looking
statements. We assume no obligation to update any
forward-looking statements as a result of new information,
future events or developments, except as required by federal
securities laws.
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PART I
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Item 1.
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Description
of the Business
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Business
Overview
Flow International Corporation and its subsidiaries (hereinafter
collectively referred to as the Company,
we, or our unless the context requires
otherwise) is a technology-based global company providing
customer-driven waterjet cutting and cleaning solutions. Our
ultrahigh-pressure water pumps generate pressures from 40,000 to
over 87,000 pounds per square inch (psi) and power waterjet
systems that are used to cut and clean materials. Waterjet
cutting is a fast-growing alternative to traditional cutting or
cleaning methods, which utilize lasers, saws, knives, shears,
plasma, routers, drills and abrasive blasting techniques, and
has uses in many applications from food and paper products to
steel and carbon fiber composites.
This portion of our
Form 10-K
provides detailed information about who we are and what we do.
Unless otherwise specified, current information reported in this
Form 10-K
is as of, or for the year ended April 30, 2009.
Our
History
Flow International Corporation was incorporated in Delaware in
1983 as Flow Systems, Inc. and was reincorporated in Washington
in October 1998. Our innovations and accomplishments through the
years include:
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Invented abrasive waterjet system in 1979
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First to introduce ultrahigh-pressure direct drive pumps up to
55,000 psi in 2000
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First to introduce
WindowsR-based
intelligent waterjet control software
FlowMastertm
to the industry
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First to introduce a 60,000 psi intensifier pump in 1998
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First to develop advanced motion control waterjet
Dynamic
WaterjetR
to increase cut accuracy and speed
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3-Dimensional
5-Axis
Waterjet machining capability
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First to introduce 87,000 psi Intensifier Pump in 2006
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Our
Business Strategy
We are a technology-based global company whose objective is to
deliver profitable dynamic growth by providing technologically
advanced waterjet cutting and cleaning solutions to our
customers. To achieve this objective, we offer versatile
waterjet cutting and industrial cleaning systems and we strive
to:
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expand market share in our current markets;
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continue to identify and penetrate new markets;
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capitalize on the our customer relationships and business
competencies;
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develop and market innovative products and applications to meet
the full continuum of user needs;
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continue to improve operating margins by focusing on operational
improvements; and
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pursue additional channels and partners for distribution
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The recent deterioration in global economic conditions has
negatively impacted our business. Instability in the stock
market and tightening of credit markets has caused a reduction
in capital spending at all levels of operations. We build
machines which require significant capital outlay across all
market segments. Against this backdrop, we are uncertain as to
how long these challenging market conditions will continue, but
we do
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not expect that economic conditions are likely to improve
significantly in the near future. Our short-term focus is to
ensure that we successfully navigate the current global
recession by carefully managing cash, balancing our expenses
with our expected revenues and to position the Company for
long-term growth.
Our ability to fully implement our strategies and achieve our
objective may be influenced by a variety of factors, many of
which are beyond our control. Refer to discussion of some of
these factors under Item 1A: Risk Factors.
Products
and Services
Our mission is to provide the highest value customer-driven
waterjet cutting and cleaning solutions. We strive to improve
our customers profitability through the development of
innovative products and services that expand our customers
markets and increase their productivity. The primary components
of our product line include versatile waterjet cutting and
industrial cleaning systems. We provide total system solutions
for various industries including aerospace, metalworking, stone
and tile, job shop, industrial cleaning, and automotive.
Our ultrahigh-pressure technology has two broad applications:
cutting and cleaning.
Waterjet Cutting. The primary application of
our ultrahigh-pressure water pumps is cutting. In cutting
applications, an ultrahigh-pressure pump pressurizes water from
40,000 to 87,000 psi, and forces it through a small orifice,
generating a high-velocity stream of water traveling at three or
more times the speed of sound. In order to cut metallic and
other hard materials, an abrasive substance, usually garnet, is
added to the waterjet stream creating an abrasive jet. Our
cutting systems typically include a robotic manipulator that
moves the cutting head. Our systems may also combine waterjet
with other applications such as conventional machining,
inspection, assembly, and other automated processes. Our
waterjet cutting systems cut virtually any shape in a single
step with edge quality that usually requires no secondary
finishing and are the most productive solutions for cutting a
wide range of materials from 1/16 inch to over 24 inches
thick. We offer two different pump technologies:
ultrahigh-pressure intensifier and direct drive pumps, ensuring
our customers get the pump that is right for them and their
unique application. Our intensifier pumps pressurize water up to
87,000 psi, and our direct drive pumps pressurize water up to
55,000 psi.
Waterjet cutting is recognized as a more flexible, cost
effective and accurate alternative to traditional cutting
methods such as lasers, saws or plasma. It offers greater
versatility in the types of products it can cut, and, because it
cuts without heat or imparted energy, often reduces or
eliminates the need for secondary processing operations and
special fixturing. Therefore, waterjet cutting has applications
in many industries, including aerospace, defense, automotive,
semiconductors, disposable products, food, glass, job shop,
sign, metal cutting, marble, tile and other stone cutting, and
paper slitting and trimming.
Industrial Cleaning Products. Our
ultrahigh-pressure industrial cleaning systems are used in
waterjet cleaning for fast surface preparation. These systems
use direct drive pumps to create pressures in the range of
40,000 to 55,000 psi. Because only pure water is used to remove
coatings, waterjetting costs less than grit blasting by
eliminating the need for collection, containment, and disposal
of abrasive. Removing coatings with water instead of grit allows
other work to be done at the same time as the waterjet
operation. Steel, mechanical and electrical work, or painting,
can be performed concurrently with waterjet industrial cleaning,
which means projects are completed in less time and there are
fewer environmental concerns than with traditional methods such
as sandblasting.
Parts and Services. We also offer consumable
parts and services. Consumables represent parts used by the pump
and cutting head during operation, such as seals and orifices.
Many of the consumable or spare parts are proprietary in nature
and are patent protected. We also sell various tools and
accessories which incorporate ultrahigh-pressure technology, as
well as aftermarket consumable parts and service for our
products.
Marketing
and Customers
Our marketing emphasizes a consultative application-oriented
sales approach and is centered on increased awareness of the
capabilities of our technology as we believe that waterjet
technology is in the early adoption phase of its product life
cycle. These efforts include presence at tradeshows, advertising
in print media and
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other product placements and demonstration/educational events as
well as an increase in domestic and international sales
representation, including distributors. To enhance the
effectiveness of sales efforts, our marketing staff and sales
force gather detailed information on the applications and
requirements in targeted market segments. We also utilize
telemarketing and the Internet to generate sales leads in
addition to lead generation through tradeshows and print media.
This information is used to develop standardized and customized
solutions using ultrahigh-pressure and robotics technologies.
We offer our spare parts and consumables through the Internet at
our flowparts.com website in the U.S. and
floweuropeparts.com in Europe where we strive to ensure that we
are able to ship a large number of parts within 24 hours to
our customers.
We have established strong relationships with a diverse set of
customers. No single customer or group of customers under common
control accounted for 10% or more of our total consolidated
sales for the respective years ending April 30, 2009, 2008
and 2007.
In the second half of fiscal 2009 we were negatively impacted by
the effects of the overall national and global recession and
slowdown in consumer and business spending. However, we believe
that the productivity-enhancing nature of our ultrahigh-pressure
technology will enable us to grow our market share in the
machine cutting tool market through the recession. Further we
believe that the diversity of our markets, along with the
relatively early adoption phase of our technology, and the
displacement of more traditional methods for machining and
fabricating, will enable us to absorb the economic downturn with
less impact than conventional machine tool manufacturers.
Competition
in Our Markets
Our major markets both domestic and
foreign are highly competitive, with our products
competing against other waterjet competitors as well as
technologies such as lasers, saws, plasma, shears, routers,
drills, and abrasive blasting techniques. Most of our waterjet
competitors provide only portions of a waterjet system such as
pumps or control systems. Other competitors integrate components
from a variety of suppliers to provide a complete solution.
Under the Flow brand, we compete in the high-end and mid-tier
segments of the waterjet cutting market through product quality
and superior service reliability, value, service and technology.
Through our secondary brand, Waterjet
Protm,
we compete in the lower priced segments of the market.
Approximately 80 firms, other than Flow, have developed tools
for cleaning and cutting based on waterjet technology. We
believe we are the leader in the global waterjet cutting systems
market.
Waterjet cutting systems offer manufacturers many advantages
over traditional cutting machines including an ability to cut or
machine virtually any material, in any direction, with improved
manufacturing times, and with minimal impact on the material
being cut. These factors, in addition to the elimination of
secondary processing in many circumstances, enhance the
manufacturing productivity of our systems.
We estimate that the waterjet cutting solutions market
opportunity exceeds $1 billion in annual potential or twice
the current level. The total market potential continues to grow
as new applications are developed. The rapidly increasing global
market for waterjet solutions while providing high growth
opportunities is also attracting new market entrants which will
increase competition.
In addition to pumps and systems, we sell spare parts and
consumables. We believe our on-time delivery and technical
service combine for the best all-around value for our customers
but, we face competition from numerous other companies who sell
non-proprietary replacement parts for our machines. While they
generally offer a lower price, we believe the quality of our
parts, coupled with our service, makes us the value leader in
spares and consumables.
Business
Segments
Effective May 1, 2008, we modified our internal reporting
process and the manner in which the business is managed and in
turn, reassessed our segment reporting. As a result of this
process, we are now reporting our operating results to the chief
operating decision maker based on market segments which has
resulted in a change to the operating and reportable segments.
Previously, we managed our business based on geography.
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Our change in operating and reportable segments from a
geographic basis to market segments is consistent with
managements long-term growth strategy. Our new reportable
segments are Standard and Advanced. The Standard segment
includes sales and expenses related to our cutting and cleaning
systems using ultrahigh-pressure water pumps as well as parts
and services to sustain these installed systems. Systems
included in this segment do not require significant custom
configuration. The Advanced segment includes sales and expenses
related to our complex Advanced segment systems which require
specific custom configuration and advanced features to match
unique customer applications as well as parts and services to
sustain these installed systems.
Financial information about our segments is included in
Note 3 Business Segments of the Notes to
the Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data.
Sales
Outside the United States
In fiscal year 2009, 58% or
$121.6 million of our total consolidated sales
were to customers outside the United States, this included:
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$24.0 million of exports from the United States;
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$48.5 million of sales from Europe; and
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$49.1 million of sales from our other foreign locations
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Raw
Materials
We depend on the availability of raw materials, parts and
subassemblies from our suppliers and subcontractors. Principal
materials used to make waterjet products are metals, and
plastics, typically in sheets, bar stock, castings, forgings and
tubing. We also purchase many electrical and electronic
components, fabricated metal parts, high-pressure fluid hoses,
ball screws, seals and other items integral to our products.
Suppliers are competitively selected based on cost, quality, and
delivery. Our suppliers ability to provide timely and
quality raw materials, components, kits and subassemblies
affects our production schedules and contract profitability. We
maintain an extensive qualification and performance surveillance
system to control risks associated with this reliance on the
supply chain. Most significant raw materials we use are
available through multiple sources.
Our strategic sourcing and new product development initiatives
seek to find ways of mitigating the inflationary pressures of
the marketplace including renegotiating with our suppliers and
customers to avoid a significant impact to our margins and
results of operations. Macro-economic pressures may increase our
operating costs with consequential risk to our cash flow and
profitability. We currently do not employ forward contracts or
other financial instruments to hedge commodity price risk,
although we continuously explore supply chain risk mitigation
strategies.
Intellectual
Property
We have a number of patents related to our processes and
products both domestically and internationally. While in the
aggregate our patents are of material importance to our
business, we believe that no single patent or group of patents
is of material importance to our business as a whole. We also
rely on non-patented proprietary trade secrets and knowledge,
confidentiality agreements, creative product development and
continuing technological advancement to maintain a technological
lead on our competitors.
Product
Development
Our research and development is focused on continued improvement
of our existing products and the development of new products.
During the year ended April 30, 2009, we expensed
$8.6 million related to product research and development as
compared to $8.3 million for 2008 and $8.7 million for
2007. Our future success depends on our ability to continue to
maintain a robust research and development program that allows
us to develop competitive new products and applications that
satisfy customer requirements, as well as enhance
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our current product lines. Research and development costs were
between 3% and 4% of total revenue during each of the years
ended April 30, 2009, 2008, and 2007.
Backlog
Our backlog increased 30% from $35.3 million at
April 30, 2008 to $45.7 million at April 30,
2009. The backlog at April 30, 2009 and 2008 represented
22% and 14% of our trailing twelve months sales as of
April 30, 2009 and 2008, respectively.
Backlog includes firm orders for which written authorizations
have been accepted and revenue has not yet been recognized.
Generally our products, exclusive of our Advanced segment
systems, can be shipped within a four to 16 week period.
Advanced segment systems typically have lead times of six to
18 months. The unit sales price for most of our 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. Due to possible customer
changes in delivery schedules and cancellation of orders, our
backlog at any particular date is not indicative of actual sales
for any succeeding period. Delays in delivery schedules
and/or a
reduction of backlog during any particular period could have a
material adverse effect on our business and results of
operations.
Working
Capital Practices
There are no special or unusual practices relating to our
working capital items. We generally require advance payments as
deposits on customized equipment and standard systems and
require progress payments during the manufacturing of these
products or prior to product shipment.
Employees
We had 649 full time employees as of April 30, 2009
compared to 759 in the prior year, with 64% located in the
United States and 36% located in other foreign locations. Our
success depends in part on our ability to attract and retain
employees. None of our employees are covered by collective
bargaining agreements.
Available
Information
The Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports filed or furnished pursuant
to section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are available free of charge through the
Companys website at www.flowcorp.com as soon as is
reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission (SEC).
The materials we file with the SEC may be read and copied at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549 and can also be obtained by
calling the SEC at
1-800-SEC-0330.
Information available on our website is not incorporated by
reference in and is not deemed a part of this
Form 10-K.
Our business is subject to certain risks and events that, if
they occur, could adversely affect our financial condition and
results of operations, and the trading price of our common stock.
You should consider the following risk factors, in addition to
the other information presented in this report and the matters
described in our Forward-Looking Statements section,
as well as other reports and registration statements we file
from time to time with the SEC, in evaluating us, our business,
and an investment in our securities.
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Risks
Related to our Business
The
recent deterioration in economic conditions and the credit
markets could adversely affect our access to capital and
adversely impact our results of operation.
There has been a deterioration in general economic conditions
and the financial and credit markets have experienced a period
of turmoil that has included the failure or sale of various
financial institutions and an unprecedented level of
intervention from the United States government. While it is
difficult to predict the ultimate results of these events, they
may impair our ability to borrow money or raise capital.
Similarly, our customers may be unable to borrow money or raise
capital to fund their operations.
Continued deteriorating or volatile market conditions could:
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adversely affect our ability to access credit markets or raise
capital on terms acceptable to us;
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limit our capital expenditures for repair or replacement of
existing facilities or equipment;
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adversely affect our ability to be in compliance with covenants
under existing credit agreements;
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have an adverse effect on our customers and suppliers and their
ability to purchase our products; and
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reduce our ability to take advantage of growth and expansion
opportunities.
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We may
not be able to comply with the financial tests or ratios
required to comply with our covenant requirements under our Line
of Credit which may impact our ability to draw funds and may
result in the acceleration of the maturity of, and/or the
termination of the Line of Credit.
Our recently amended Line of Credit agreement requires us to
comply with or maintain certain financial tests and ratios and
restrict our ability to:
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draw down on our existing line of credit or incur more debt;
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make certain investments and payments;
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fund additional letters of credit;
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pay cash dividends; and
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transfer or sell assets.
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Our ability to comply with these covenants is subject to various
risks and uncertainties. In addition, events beyond our control
could affect our ability to comply with and maintain the
financial tests and ratios required by this indebtedness. Any
failure by us to comply with and maintain all applicable
financial tests and ratios and to comply with all applicable
covenants could result in an event of default with respect to a
substantial portion of our debt which would result in the
acceleration of the maturity
and/or the
termination of our credit facility. Even if we are able to
comply with all applicable covenants, the restrictions on our
ability to operate our business in our sole discretion could
harm our business by, among other things, limiting our ability
to take advantage of financing, mergers, acquisitions and other
corporate opportunities.
We may
need to raise additional funds to finance our future capital
and/or operating needs.
The Company may need to raise additional funds through public or
private debt or sale of equity to achieve our current business
strategy. Subsequent to the end of the fiscal year, we filed a
shelf registration statement with the SEC covering the offer and
sale, at our discretion, of up to $35 million in common and
preferred stock, warrants, and units. This registration
statement has not yet been declared effective by the SEC. The
financing we need may not be available when needed. Even if this
financing is available, it may be on terms that we deem
unfavorable or are materially adverse to our shareholders
interests, and may involve substantial dilution to our
shareholders. Our inability to obtain financing will inhibit our
ability to implement our development strategy, and as a result,
could require us to diminish or suspend our development strategy
and possibly cease certain of our operations. If we require
additional funds and are unable to obtain additional financing
on reasonable terms, we could be forced to delay, scale back or
eliminate certain product
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development programs
and/or our
capital projects. In addition, such inability to obtain
additional financing on reasonable terms could have a negative
effect on our business, operating results, or financial
condition to such extent that we are forced to restructure, sell
assets or cease operations, any of which could put our
shareholders investment dollars at significant risk.
Our
results of operations and financial condition could be
materially affected by changes in product mix or
pricing.
Our overall profitability may not meet expectations if our
products, customers or geographic mix are substantially
different than anticipated. Our profit margins vary among
products, customers and geographic markets. Consequently, if our
mix of any of these is substantially different from what is
anticipated in any particular period, our profitability may be
lower than anticipated.
If we
fail to obtain sufficient quantities of materials, components
and equipment required for our manufacturing activities at
competitive prices and quality and on a timely basis or fail to
effectively adapt out cost structure to changing market
conditions our business and financial results will
suffer.
We purchase materials, components and equipment from third
parties for use in our manufacturing operations. Some of our
business units purchase these items from sole or limited source
suppliers. If we cannot obtain sufficient quantities of
materials, components and equipment at competitive prices and
quality and on a timely basis, we may not be able to produce
sufficient quantities of product to satisfy market demand,
product shipments may be delayed or our material or
manufacturing costs may increase. In addition, because we cannot
always immediately adapt our cost structures to changing market
conditions, our manufacturing capacity may at times exceed our
production requirements or fall short of our production
requirements. Any or all of these problems could result in the
loss of customers, provide an opportunity for competing products
to gain market acceptance and otherwise adversely affect our
business and financial results.
If we
fail to technologically advance our products through continued
research and development, our financial results may be adversely
affected.
In order to maintain our position in the market, we need to
continue investment in research and development to improve our
products and technologies and to introduce new products and
technologies. If we are unable to make such investment, if our
research and development efforts do not lead to new
and/or
improved products or technologies, or if we experience delays in
the development or acceptance of new
and/or
improved products, our financial condition and results of
operations could be adversely affected.
We
might fail to adequately protect our intellectual property
rights or third parties might assert that our technologies
infringe on their intellectual property.
We rely on a combination of patents, trade secrets, trademarks
and copyrights to protect our intellectual property, but this
protection might be inadequate. For example, our pending or
future patent applications might not be approved or, if allowed,
they might not be of sufficient strength or scope. Conversely,
third parties, certain of whom have filed lawsuits against us in
the past, might assert that our technologies infringe their
proprietary rights. Any future related litigation to defend our
intellectual property
and/or
defend ourselves from assertions of infringement could result in
substantial costs and diversion of our efforts and could
adversely affect our business, whether or not we are ultimately
successful.
Foreign
currency exchange rates and commodity prices may adversely
affect our results of operations and financial
condition.
We are exposed to a variety of market risks, including the
effects of changes in foreign currency exchange rates and
commodity prices. We have substantial assets, liabilities,
revenues and expenses denominated in currencies other than the
U.S. dollar, and to prepare our consolidated financial
statements, we must translate these items into U.S. dollars
at the applicable exchange rates. In addition, we are a large
buyer of steel, as
10
well as other commodities required for the manufacture of
products. As a result, changes in currency exchange rates and
commodity prices may have an adverse effect on our results of
operations and financial condition.
Changes
in our income tax rates or exposure to additional income tax
liabilities could affect our profitability. In addition, audits
by tax authorities could result in additional tax payments for
prior periods.
We are subject to income taxes in the U.S. and in various
foreign jurisdictions. Domestic and international tax
liabilities are subject to the allocation of income among
various tax jurisdictions. Our effective tax rate can be
affected by changes in the mix of earnings in countries with
differing statutory tax rates, changes in the valuation of
deferred tax assets and liabilities, accruals related to
unrecognized tax benefits, the results of audits and
examinations of previously filed tax returns and changes in tax
laws. Any of these factors may adversely affect our tax rate and
decrease our profitability. The amount of income taxes we pay is
subject to ongoing audits by U.S. federal, state and local
tax authorities and by
non-U.S. tax
authorities. If these audits result in assessments different
from our unrecognized tax benefits, our future results may
include unfavorable adjustments to our tax liabilities.
Unexpected
losses in future reporting periods may require the Company to
adjust the valuation allowance against its deferred tax
assets.
We evaluate our deferred tax assets for recoverability based on
all available evidence. This process involves significant
management judgment about assumptions that are subject to change
from period to period based on changes in tax laws or variances
between the future projected operating performance and the
actual results. We are required to establish a valuation
allowance for deferred tax assets if we determine, based on
available evidence at the time the determination is made, that
it is more likely than not that some portion or all of the
deferred tax assets will not be realized. In determining the
more-likely-than-not criterion, we evaluate all positive and
negative available evidence as of the end of each reporting
period. Future adjustments, either increases or decreases, to
the deferred tax asset valuation allowance will be determined
based upon changes in the expected realization of the net
deferred tax assets. The realization of the deferred tax assets
ultimately depends on the existence of sufficient taxable income
in either the carry back or carry forward periods under the tax
law. Due to significant estimates utilized in establishing the
valuation allowance and the potential for changes in facts and
circumstances, it is reasonably possible that we may be required
to record adjustments to the valuation allowance in future
reporting periods. Such a charge could have a material adverse
effect on our results of operations and financial condition. As
of April 30, 2009, we had approximately $20 million of
net deferred tax assets.
We
have unresolved claims with the Purchaser of
Avure.
During fiscal year 2009, we were notified by the purchaser of
our Avure Business (Purchaser), which we reported as
discontinued operations for the year ended April 30, 2006,
that the Swedish tax authority was conducting an audit which
includes periods during the time that the Company owned the
subsidiary. The Purchaser has indicated that it expects the
Company to indemnify its losses, if any, that result from any
penalties and fines assessed related to the tax audit for
periods during which the Company owned Avure. This tax audit is
currently underway and at this time, the Company is not able to
quantify its exposure, if any.
International
economic, political, legal and business factors could negatively
affect our results of operations, cash flows and financial
condition.
In fiscal 2009, approximately 58% of our sales were derived
outside the U.S. Since our growth strategy depends in part
on our ability to further penetrate markets outside the U.S., we
expect to continue to increase our sales outside the U.S.,
particularly in emerging markets. In addition, some of our sales
distribution offices and many of our suppliers are located
outside the U.S. Our international business is subject to
risks that are customarily encountered in
non-U.S. operations,
including:
|
|
|
|
|
interruption in the transportation of materials to us and
finished goods to our customers;
|
|
|
|
changes in a specific countrys or regions political
or economic conditions;
|
11
|
|
|
|
|
trade protection measures;
|
|
|
|
import or export licensing requirements;
|
|
|
|
unexpected changes in laws or licensing and regulatory
requirements, including negative consequences from changes in
tax laws;
|
|
|
|
limitations on ownership and on repatriation of earnings;
|
|
|
|
difficulty in staffing and managing widespread operations;
|
|
|
|
differing labor regulations;
|
|
|
|
differing protection of intellectual property; and
|
|
|
|
terrorist activities and the U.S. and international
response thereto.
|
Any of these risks could negatively affect our results of
operations, cash flows, financial condition and overall growth.
If we
are unable to complete the upgrades to our information
technology systems that are currently in process, or our
upgrades are unsuccessfully implemented, our future success may
be negatively impacted.
In order to maintain our leadership position in the market and
efficiently process increased business volume, we are making a
significant multi-year upgrade to our computer hardware,
software and our Enterprise Resource Planning (ERP)
system. Should we be unable to continue to fund this upgrade, or
should the ERP system upgrade be unsuccessful or take longer to
implement than anticipated, our ability to grow the business and
our financial results could be adversely impacted.
We may
incur net losses in the future, and we may not be able to regain
or sustain profitability on a quarterly or annual
basis.
We incurred net losses in the latter half of our fiscal year
2009. We may continue to incur net losses in the future
including losses from our operations, the impairment of
long-lived assets and restructuring charges. There can be no
assurance that we will be able to conduct our business
profitably in the future.
Our
stock price has been and is likely to continue to be highly
volatile.
The trading price of our common stock has been highly volatile.
On June 12, 2009, the closing price of our common stock was
$2.67. Our stock price could decline or be subject to wide
fluctuations in response to response to factors such as the
risks discussed in this section and the following:
|
|
|
|
|
actual or anticipated fluctuations in our operating results
or our competitors operating results;
|
|
|
|
announcements by us or our competitors of new products,
|
|
|
|
capacity changes, significant contracts, acquisitions or
strategic investments;
|
|
|
|
our growth rate and our competitors growth rates;
|
|
|
|
changes in stock market analyst recommendations regarding us,
our competitors or our industry generally ,or lack of analyst
coverage of our common stock;
|
|
|
|
sales of our common stock by our executive officers,
directors and significant stockholders or sales of substantial
amounts of common stock; and
|
|
|
|
changes in accounting principles.
|
In addition, there has been significant volatility in the market
price and trading volume of our securities that is sometimes
unrelated to our operating performance. Some companies that have
had volatile market prices for their securities have had
securities litigation brought against them. If litigation of
this type is
12
brought against us it, it could result in substantial costs and
would divert managements attention and resources.
If we
are unable to hire, retain and motivate highly qualified
employees, including our key employees, we may not be able to
successfully manage our business.
Our success depends on our ability to identify, attract, hire,
retain and motivate highly skilled technical, managerial, sales
and marketing, and corporate development personnel. If we fail
to successfully hire and retain a sufficient number of highly
qualified employees, we may have difficulties in supporting our
customers or expanding our business. Realignments of resources,
reductions in workforce, temporary reductions of wages and
suspension of certain benefits in response to the economic
downturn,
and/or other
operational decisions have created and could continue to create
an unstable work environment that may have a negative effect on
our ability to hire, retain and motivate employees.
Our business and operations are substantially dependent on the
performance of our key employees, all of whom, except our chief
executive officer, are employed on an at-will basis. While none
of our key personnel is irreplaceable, the loss of the services
of any of these individuals may be disruptive to our business.
There can be no assurance that any retention program we initiate
will be successful at retaining employees, including key
employees.
Risks
Related to the Industries in Which We Operate
Intense
competition in our markets could prevent us from increasing
distribution of our products in those markets or cause us to
lose market share.
We face competition in a number of our served markets as a
result of the entry of new competitors and alternative
technologies such as lasers, saws, plasma, shears, routers,
drills and abrasive blasting techniques. Many of our competitors
or potential competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer
operating histories, more developed infrastructures or more
established relationships in the industry than we have. Our
competitors may be able to adopt more aggressive pricing
policies, develop and expand their product offerings more
rapidly, take advantage of acquisitions and other opportunities
more readily, achieve greater economies of scale, and devote
greater resources to the marketing and sale of their products
than they do. Our failure to compete effectively may reduce our
revenues, profitability and cash flow, and pricing pressures may
adversely impact our profitability.
Cyclical
economic conditions may adversely affect our financial condition
and results of operations or our growth rate could decline if
the markets into which we sell our products decline or do not
grow as anticipated.
Our products are sold in industries and end-user applications
that have historically experienced periodic downturns, such as
automotive, aerospace, paper, job shops and stone and tile.
Cyclical weaknesses in the industries that we serve have led and
could continue to lead to a reduced demand for our products and
adversely affect our financial condition and results of
operations. Any competitive pricing pressures, slowdown in
capital investments or other downturn in these industries could
adversely affect our financial condition and results of
operations in any given period. Additionally, visibility into
our markets is limited. Our quarterly sales and operating
results depend substantially on the volume and timing of orders
received during the quarter, which are difficult to forecast.
Any decline in our customers markets would likely result
in diminished demand for our products and services and would
adversely affect our growth rate and profitability.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
There are no unresolved comments that were received from the SEC
staff relating to our periodic or current reports under the
Securities Exchange Act of 1934 as of April 30, 2009.
13
We occupied approximately 388 thousand square feet of floor
space on April 30, 2009 for manufacturing, warehousing,
engineering, administration and other productive uses, of which
approximately 52% was located in the United States.
The following table provides a summary of the floor space by
segment:
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
Leased
|
|
|
|
(In square feet)
|
|
|
Standard
|
|
|
88,300
|
|
|
|
240,500
|
|
Advanced
|
|
|
40,200
|
|
|
|
18,700
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
128,500
|
|
|
|
259,200
|
|
|
|
|
|
|
|
|
|
|
We have operations at the following locations:
|
|
|
|
|
Standard Kent, Washington, which is our
headquarters and the primary ultrahigh-pressure pump
manufacturing facility; Yokohama and Nagoya, Japan; Shanghai,
QuangChou and Beijing, China; Hsinchu, Taiwan; Bretten, Germany;
Birmingham, England; Milan, Italy; Madrid, Spain; Lyon, France;
Brno, Czech Republic; Sao Paulo, Brazil; and Buenos Aires;
Argentina;
|
|
|
|
Advanced Jeffersonville, Indiana, a
manufacturing facility.
|
We believe that our principal properties are adequate for our
present needs and, supplemented by planned improvements and
construction, expect them to remain adequate for the foreseeable
future.
|
|
Item 3.
|
Legal
Proceedings
|
Refer to Note 15 Commitments and
Contingencies of the Notes to Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data for a summary of legal proceedings.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended April 30, 2009
through the solicitation of proxies or otherwise.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our stock is traded on the NASDAQ Stock Market under the symbol
FLOW. The range of high and low sales prices for our
common stock for the last two fiscal years is set forth in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2009
|
|
|
Fiscal Year 2008
|
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
First Quarter
|
|
$
|
5.05
|
|
|
$
|
11.40
|
|
|
$
|
9.23
|
|
|
$
|
13.34
|
|
Second Quarter
|
|
|
2.86
|
|
|
|
10.19
|
|
|
|
7.65
|
|
|
|
9.76
|
|
Third Quarter
|
|
|
1.21
|
|
|
|
4.10
|
|
|
|
7.22
|
|
|
|
10.05
|
|
Fourth Quarter
|
|
|
1.05
|
|
|
|
1.98
|
|
|
|
7.34
|
|
|
|
10.45
|
|
Holders
of the Companys Common Stock
As of June 12, 2009, there were approximately 1,046 holders
of record of our common stock.
14
Dividends
We have not paid dividends to common shareholders in the past.
Our Board of Directors intends to retain future earnings, if
any, to finance development and expansion of our business and
reduce debt and does not expect to declare dividends to common
shareholders in the near future. Our ability to pay cash
dividends is restricted under our senior Credit Facility
Agreement which was originally signed on June 9, 2008 and
amended in December 2008, March 2009 and June 2009. Refer to
Note 13 Long-Term Obligations and Notes
Payable to the Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data,
for further discussion on this credit facility.
Issuer
Purchases of Equity Securities
None.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information about the Companys equity compensation plans
as of April 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Weighted Average
|
|
|
|
|
|
|
to be Issued Upon
|
|
|
Exercise Price of
|
|
|
Number of Securities
|
|
|
|
Exercise of
|
|
|
Outstanding
|
|
|
Remaining Available
|
|
|
|
Outstanding Options
|
|
|
Options
|
|
|
for Future Issuance
|
|
|
Equity Compensation Plans approved by security holders
|
|
|
798,810
|
|
|
$
|
10.49
|
|
|
|
1,006,589
|
|
For more detailed information regarding the Companys
equity compensation plans, refer to Note 17
Stock-based Compensation to the Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data.
15
Comparison
of Five-Year Cumulative Total Shareholder Return*
The graph below compares the cumulative
5-year total
return of holders of our common stock with the cumulative total
returns of the S&P Smallcap 600 index, the NASDAQ Composite
index, and the Dow Jones US Industrial Machinery index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/04
|
|
|
|
4/05
|
|
|
|
4/06
|
|
|
|
4/07
|
|
|
|
4/08
|
|
|
|
4/09
|
|
Flow International Corporation
|
|
|
|
100.00
|
|
|
|
|
232.16
|
|
|
|
|
530.20
|
|
|
|
|
456.47
|
|
|
|
|
393.33
|
|
|
|
|
71.37
|
|
S&P Smallcap 600
|
|
|
|
100.00
|
|
|
|
|
110.43
|
|
|
|
|
145.10
|
|
|
|
|
156.19
|
|
|
|
|
142.07
|
|
|
|
|
99.37
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
100.90
|
|
|
|
|
124.20
|
|
|
|
|
136.38
|
|
|
|
|
130.63
|
|
|
|
|
91.41
|
|
Dow Jones US Industrial Machinery
|
|
|
|
100.00
|
|
|
|
|
106.39
|
|
|
|
|
90.30
|
|
|
|
|
94.11
|
|
|
|
|
106.53
|
|
|
|
|
63.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The stock price performance included in this graph is not
necessarily indicative of future stock price performance. |
Performance
Graph Assumptions
|
|
|
|
|
Assumes a $100.00 investment in our common stock and in each
index in April 30, 2004 and tracks it through to
April 30, 2009.
|
|
|
|
Total return assumes all dividends are reinvested.
|
|
|
|
Measurement dates are the last trading day of the fiscal year
shown.
|
Recent
Sales of Unregistered Securities
None.
16
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our audited consolidated financial
statements, the related notes and Managements Discussion
and Analysis of Financial Condition and Results of Operations,
which are included in this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
2005(1)(2)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
210,103
|
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
|
$
|
202,658
|
|
|
$
|
169,289
|
|
Income (Loss) From Continuing Operations
|
|
|
(23,086
|
)
|
|
|
21,911
|
|
|
|
4,022
|
|
|
|
7,047
|
|
|
|
(12,772
|
)
|
Net Income (Loss)
|
|
|
(23,819
|
)
|
|
|
22,354
|
|
|
|
3,755
|
|
|
|
6,677
|
|
|
|
(21,197
|
)
|
Basic Income (Loss) Per Share From Continuing Operations
|
|
|
(0.61
|
)
|
|
|
0.59
|
|
|
|
0.11
|
|
|
|
0.20
|
|
|
|
(0.72
|
)
|
Basic Net Income (Loss) Per Share
|
|
|
(0.63
|
)
|
|
|
0.60
|
|
|
|
0.10
|
|
|
|
0.19
|
|
|
|
(1.19
|
)
|
Diluted Income (Loss) Per Share From Continuing Operations
|
|
|
(0.61
|
)
|
|
|
0.58
|
|
|
|
0.11
|
|
|
|
0.19
|
|
|
|
(0.72
|
)
|
Diluted Net Income (Loss) Per Share
|
|
|
(0.63
|
)
|
|
|
0.59
|
|
|
|
0.10
|
|
|
|
0.18
|
|
|
|
(1.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital
|
|
$
|
27,923
|
|
|
$
|
56,126
|
|
|
$
|
43,108
|
|
|
$
|
41,857
|
|
|
$
|
6,154
|
|
Total Assets
|
|
|
144,960
|
|
|
|
151,155
|
|
|
|
123,172
|
|
|
|
119,301
|
|
|
|
118,467
|
|
Short-Term Obligations
|
|
|
16,593
|
|
|
|
2,095
|
|
|
|
7,188
|
|
|
|
3,247
|
|
|
|
13,443
|
|
Long-Term Obligations, net
|
|
|
1,937
|
|
|
|
2,333
|
|
|
|
2,779
|
|
|
|
3,774
|
|
|
|
5,704
|
|
Shareholders Equity
|
|
|
62,711
|
|
|
|
86,064
|
|
|
|
61,224
|
|
|
|
56,557
|
|
|
|
29,464
|
|
|
|
|
(1) |
|
Our consolidated statements of operations for fiscal years 2007
through 2005 have been recast to reflect the results of
operations of our CIS Technical Solutions division as
discontinued operations. |
|
(2) |
|
Our consolidated statement of operations for fiscal year 2005
has been recast to give effect to the sale of the Avure Business
and present the results for the Avure Business as discontinued
operations. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and
accompanying notes included elsewhere in this
Form 10-K.
Our MD&A includes the following major sections:
|
|
|
|
|
Executive Summary
|
|
|
|
Results of Operations
|
|
|
|
Liquidity and Capital Resources
|
|
|
|
Contractual Obligations
|
|
|
|
Off Balance Sheet Arrangements
|
|
|
|
Critical Accounting Policies and Estimates
|
|
|
|
Recently Issued Accounting Pronouncements
|
17
Executive
Summary
We are a technology-based global company whose objective is to
deliver profitable dynamic growth by providing technologically
advanced waterjet cutting and cleaning systems to our customers.
To achieve this objective, we offer versatile waterjet cutting
and industrial cleaning systems and we strive to:
|
|
|
|
|
expand market share in our current markets;
|
|
|
|
continue to identify and penetrate new markets;
|
|
|
|
capitalize on our customer relationships and business
competencies;
|
|
|
|
develop and market innovative products and applications;
|
|
|
|
continue to improve operating margins by focusing on operational
improvements; and
|
|
|
|
pursue additional channels and partners for distribution.
|
Over the past year, we have taken important steps to further the
implementation of our strategy. One of the initiatives in our
overall strategy is the continued expansion of market share in
our current markets. In addition to the continued growth of the
business in our South America and Japan markets, we opened a
distribution office in the Czech Republic in order to focus on
expanding our presence in Europe.
During the latter half of fiscal year 2009, we, like many
companies in the United States, experienced the impact of the
current economic recession across most of the markets we serve.
We have implemented, or are in the process of initiating, a
number of measures in response to the downturn in the near term
demand for our products.
First, since the beginning of fiscal 2009, we have reduced our
global salaried staffing levels by more than 110 positions, or
15%. We incurred charges of approximately $1.1 million
during the year in conjunction with this staff reduction. These
charges are not part of a formally adopted restructuring plan
and have been recorded in Restructuring and Other
Charges in our Consolidated Statement of Operations.
Second, as part of our ongoing efforts to streamline our
manufacturing infrastructure, we implemented a plan to establish
a single facility for designing and building the advanced
waterjet systems at our Jeffersonville, Indiana facility and
closed our manufacturing facility in Burlington, Ontario, Canada
in fiscal year 2009. The relocation of the production for this
consolidation occurred in the first and second quarters of
fiscal year 2009 and was complete by the end of the fiscal year.
We recorded charges of $2.0 million associated with this
facility closure in fiscal year 2009. We do not anticipate any
further costs related to this facility closure in future
periods. In the second quarter of fiscal 2009, as part of our
continuous review of strategic alternatives globally, we further
resolved to close our office and operations in Korea and sell
our products through a distributor network. The charges
associated with this action during the second quarter of fiscal
2009 were $151,000. We incurred additional charges of $85,000
related to lease termination costs and legal expenses during the
second half of fiscal 2009 and expect to incur approximately
$30,000 to complete the legal wind-down of this facility in
fiscal year 2010.
Third, in the fourth quarter of fiscal year 2009, we committed
to a plan to centralize certain of our manufacturing activities
from Taiwan to the United States in order to reduce excess
capacity in our manufacturing plants. This plan was culminated
by a decision, in June 2009, to cease all of our remaining
manufacturing activities at this location. Charges associated
with the fourth quarter actions included employee severance and
termination benefits of $375,000 which had been fully paid off
by April 30, 2009 and inventory impairment charges of
$36,000. We estimate that the additional costs associated with
the culmination of this plan in June 2009 will range from
$0.3 million to $0.4 million in the first quarter of
fiscal 2010.
Facility shut down costs have been included in
Restructuring and Other Charges in the Consolidated
Statements of Operations, except for the inventory write-down
which has been included as part of Cost of Sales.
Refer to
Note 11-
Accrued Liabilities of the Notes to the Consolidated
Financial Statements included in Item 8, Financial
Statements and Supplementary Data, for further discussion on
restructuring charges.
18
As one of the initiatives to expand market share in our current
markets, we entered into an Option Agreement to acquire OMAX
Corporation (OMAX) in the third quarter of fiscal
year 2008. OMAX is a provider of precision-engineering, computer
controlled, two-axis abrasivejet systems for use in the general
machine shop environment. The purchase price pursuant to the
Option Agreement was $108.75 million payable in cash and
stock as well as an earn-out provision of up to $26 million
on the two-year anniversary of the closing of the merger. In
September 2008, we entered into a Merger Agreement with OMAX,
amended in November 2008 and March 2009, which effectively
reduced the purchase price to $75 million payable in a
combination of cash, stock and a note payable. Further, the
Merger Agreement, as amended, provided for an earn-out provision
of up to $52 million on the third anniversary of the
closing of the merger. In May 2009, we decided to terminate our
option to acquire OMAX following a thorough investigation of
financing alternatives to complete the merger and unsuccessful
attempts to negotiate a lower purchase price. Refer to
Note 4 Discontinued Operations, Mergers and
Investments of the Notes to the Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data, for further discussion a Settlement and
Cross License Agreement signed with OMAX in March 2009 as well
as the anticipated charge that will be recorded in the first
quarter of fiscal year 2010 in connection with the termination
of the Merger Agreement.
We continue to focus strongly on working capital management and
cash flow generation. In addition, we are also limiting our
investments to strategic capital expenditures. These efforts
will result in additional resources to provide flexibility in
the event of a prolonged economic downturn.
We anticipate that the initiatives taken above, in addition to
the continued implementation of our long-term strategy, will
enable us to mitigate the adverse effects resulting from
continuing recessionary economic conditions and emerge as a
stronger and more viable company when we exit the recession.
Our ability to fully implement our strategies and achieve our
objective may be influenced by a variety of factors, many of
which are beyond our control. These risks and uncertainties
pertaining to our business are set forth in Part I,
Item 1A Risk Factors.
Results
of Operations
Summary
Consolidated Results for Fiscal Years 2009, 2008, and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2009
|
|
|
% Change 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Versus 2008
|
|
|
Versus 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
210,103
|
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
|
|
(14
|
)%
|
|
|
14
|
%
|
Operating Income (Loss)
|
|
|
(29,634
|
)
|
|
|
16,779
|
|
|
|
4,657
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2009
|
|
|
% Change 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Versus 2008
|
|
|
Versus 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
|
|
$
|
145,944
|
|
|
$
|
176,755
|
|
|
$
|
155,463
|
|
|
|
(17
|
)%
|
|
|
14
|
%
|
Consumable parts
|
|
|
64,159
|
|
|
|
67,504
|
|
|
|
57,972
|
|
|
|
(5
|
)%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
210,103
|
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
|
|
(14
|
)%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
Fiscal
year 2009 compared to fiscal year 2008
Despite the weak macroeconomic conditions in North America as we
entered into fiscal year 2009, our consolidated systems sales
remained consistent with the prior year during the first half of
the year. However, during the second half of the fiscal year, we
experienced a significant decline in system sales mainly as a
result of delayed capital spending and expansion plans as well
as an increase in the lead time from quote to purchase by
customers in North America and Europe. These changes in consumer
spending and behavior led to a weak second half of fiscal 2009
with sales down by $30.2 million or 32% in these two
geographies.
19
Consolidated consumable parts sales increased by
$2.2 million or 7% in the first half of the fiscal year
primarily as a result of the continued increase in our installed
base of systems but declined by $6.0 million or 17% in the
latter half of the fiscal year due to lower capacity utilization
in our customers operations. These declines were slightly
offset by improved sales of a combined $2.5 million in the
rest of our geographies.
The operating loss of $29.6 million in fiscal year 2009 was
primarily driven by the following:
|
|
|
|
|
a charge of $29 million to record the settlement of a
patent litigation with OMAX, which is discussed in
Note 15 Commitments and Contingencies of
the Notes to the Condensed Consolidated Financial Statements;
|
|
|
|
a goodwill impairment charge of $2.8 million, which is
discussed in Note 10 Goodwill of the
Notes to the Condensed Consolidated Financial
Statements; and
|
|
|
|
Restructuring and Other expenses of $6.9 million for
restructuring charges recorded to reduce global staffing levels
and to shut down our Burlington, Korea, and Taiwan manufacturing
operations. Included in Other was $3.8 million
of direct transaction costs that had been capitalized as part of
the cost of the contemplated merger with OMAX under Statement of
Financial Accounting Standards No. 141, Business
Combinations (SFAS 141). Under Statement of
Financial Accounting Standards No. 141 (Revised 2007),
Business Combinations (SFAS 141R),
we had the option to expense these costs in the fourth quarter
of its fiscal year 2009 if it was deemed probable that the
transaction would not close prior to the adoption of this
standard on May 1, 2009.
|
The above charges were offset by lower corporate and general
expenses, primarily lower performance awards expense as well as
reduced headcount related expenses.
Fiscal
year 2008 compared to fiscal year 2007
Sales growth of $30.8 million or 14% was primarily driven
by increased adoption of waterjet cutting and cleaning
technology in the global markets and increased sales of 87,000
psi systems. The strengthening of the Brazilian Real versus the
U.S. dollar improved our competitive position in Latin
America markets. Excluding the impact of foreign currency
changes, sales increased $20.2 million or 10% in 2008.
Total system sales were up $21.3 million or 14%. Excluding
sales to the aerospace industry and Applications segment, system
sales increased 22%. Consumable parts sales increased
$9.5 million or 16% due to the increased installed base of
systems and improved parts availability as well as the use of
Flowparts.com and Floweuropeparts.com, our easy-to-use internet
order entry systems. Flowparts.com has been deployed in the
United States for three years and Floweuropeparts.com has been
deployed in Europe for approximately two years.
Operating income growth of $12.1 million was primarily
driven by the higher sales discussed above along with lower
operating expenses related to the timing of new product
launches. In fiscal year 2006, we incurred expenses related to
new core product development such as
Stonecraftertm,
the 87,000 psi pump and the 55,000 psi Husky. Additionally,
there were lower professional fees for legal, audit, and
consulting fees for assistance with Sarbanes-Oxley related
compliance during fiscal year 2008.
Segment
Results of Operations
Effective May 1, 2008, we modified our internal reporting
process and the manner in which the business is managed and in
turn, reassessed our segment reporting. As a result of this
process, we are now reporting our operating results to the chief
operating decision maker based on market segments which has
resulted in a change to the operating and reportable segments.
Previously, we managed our business based on geography. Our
change in operating and reportable segments from a geographic
basis to market segments is consistent with managements
long-term growth strategy. Our new reportable segments are
Standard and Advanced. The Standard segment includes sales and
expenses related to our cutting and cleaning systems using
ultrahigh-pressure water pumps as well as parts and services to
sustain these installed systems. Systems included in this
segment do not require significant custom configuration. The
Advanced segment includes sales and expenses
20
related to our complex aerospace and automation systems which
require specific custom configuration and advanced features to
match unique customer applications as well as parts and services
to sustain these installed systems.
This section provides a comparison of net sales and operating
expenses for each of our reportable segments for the last three
fiscal years. A discussion of corporate overhead and general
expenses related to inactive subsidiaries which do not
constitute segments has also been provided under All
Other. For further discussion on our reportable segments,
refer to Note 3 Business Segments of the Notes to
the Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data.
Standard
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2009
|
|
|
% Change 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Versus 2008
|
|
|
Versus 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
181,132
|
|
|
$
|
216,063
|
|
|
$
|
179,339
|
|
|
|
(16
|
)%
|
|
|
20
|
%
|
% of total company sales
|
|
|
86
|
%
|
|
|
88
|
%
|
|
|
84
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Gross Margin
|
|
|
79,743
|
|
|
|
97,868
|
|
|
|
81,940
|
|
|
|
(19
|
)%
|
|
|
19
|
%
|
Gross Margin as % of sales
|
|
|
44
|
%
|
|
|
45
|
%
|
|
|
46
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
38,656
|
|
|
|
38,833
|
|
|
|
35,229
|
|
|
|
(1
|
)%
|
|
|
10
|
%
|
Research and Engineering
|
|
|
7,529
|
|
|
|
6,615
|
|
|
|
7,017
|
|
|
|
14
|
%
|
|
|
(6
|
)%
|
General and Administrative
|
|
|
11,446
|
|
|
|
11,453
|
|
|
|
12,388
|
|
|
|
0
|
%
|
|
|
(8
|
)%
|
Restructuring Charges and Other
|
|
|
1,044
|
|
|
|
0
|
|
|
|
0
|
|
|
|
NM
|
|
|
|
NM
|
|
Total Operating Expenses
|
|
|
58,675
|
|
|
|
56,901
|
|
|
|
54,634
|
|
|
|
3
|
%
|
|
|
4
|
%
|
Operating Income
|
|
|
21,068
|
|
|
|
40,967
|
|
|
|
27,306
|
|
|
|
(49
|
)%
|
|
|
50
|
%
|
NM = Not Meaningful
Fiscal
year 2009 compared to fiscal year 2008
Sales in our standard segment decreased $34.9 million or
16% over the prior year. This decline is primarily due to the
following:
|
|
|
|
|
Significant standard system sales volume declines in North
America and Europe which are the markets affected the most by
the current recession. These two regions had a combined decline
in system sales of $35.5 million or 28% for year ended
April 30, 2009, respectively, over the prior year. This
decline was offset by a $4.1 or 19.3% increase in combined sales
in South America and Asia Pacific regions in fiscal year 2009,
due to continued strong demand for our standard shapecutting
systems in those markets. Consumable parts revenue for this
segment also declined by $2.0 million in fiscal
2009; and
|
|
|
|
Excluding the impact of foreign currency changes, sales in the
Standard segment declined $32.8 million or 15.2% in fiscal
year 2009 compared to the prior year comparative period.
|
Gross margin in fiscal year 2009 was $79.7 million or 44%
compared to $97.9 million or 45% in the prior year.
Generally, comparison of gross margin rates will vary period
over period based on changes in our product sales mix and
prices, and levels of production volume. The 100 basis
point decline in our margins in fiscal year 2009 was primarily
attributable to a greater mix of lower margin systems versus the
prior year.
Operating expense changes consisted of the following:
|
|
|
|
|
A decrease in sales and marketing expenses of $177,000 or 1% was
a result of lower commission expense based on lower sales volume
offset by $0.8 million of expenses associated with our
attendance at the bi-annual International Manufacturing
Technology Show (IMTS) in fiscal year 2009;
|
21
|
|
|
|
|
An increase in research and engineering expenses of $914,000 or
14% which was mainly attributable to increased investment in
research and development activity for new product development as
well as lower reimbursements for product development costs in
the current period; and
|
|
|
|
General and administrative expenses were consistent with the
prior year;
|
|
|
|
Restructuring and Other Charges of $1.0 million in the
Standard segment is related to charges recorded to reduce global
staffing levels and to shut down our Korea, and Taiwan
manufacturing operations.
|
Fiscal
year 2008 compared to fiscal year 2007
In fiscal year 2008:
Sales increased $36.7 million or 20% over the prior year
and constituted 88% of total sales primarily due to the
following:
|
|
|
|
|
Increased market awareness and adoption of waterjet technology
and the positive market reception to our 87k high pressure pump;
|
|
|
|
Strong demand for our spare parts due to increased number of
systems in service; and
|
|
|
|
The benefit of a favorable currency impact mainly attributable
to a stronger Euro and Brazilian Real versus the
U.S. dollar. Excluding the impact of foreign currency
changes, sales increased $28.3 million or 16% compared to
fiscal year 2007.
|
Gross margin for the year ended April 30, 2008 amounted to
$97.9 million or 45% of sales compared to
$81.9 million or 46% of sales in the prior year. Generally,
comparison of gross margin rates will vary period over period
based on changes in our product sales mix and prices, which
includes product mix, standard systems versus consumable parts
mix and levels of production volume. Excluding the impact of
foreign currency changes, gross margin increased
$13 million over the prior year.
Operating expense changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $3.6 million
10% as a result of increased investment in sales staff globally
as well as an increase in commission expense driven by higher
sales;
|
|
|
|
A reduction in research and engineering costs of $402,000 or 6%
related to the timing of new product launches. The prior year
comparative period included engineering expenses to support new
core product development such as
Stonecraftertm,
the 87,000 psi pump, and the 55,000 psi pump; and
|
|
|
|
A reduction in general and administrative expenses of $935,000
or 8% primarily attributable to lower legal and consulting
expenses including a $475,000 benefit from an insurance recovery
related to the theft in our Korean operation. Prior year general
and administrative expenses included Asia investigation expenses.
|
|
|
|
Excluding the impact of foreign currency changes, operating
expenses decreased $13 million or 16% over the prior year.
|
Advanced
Segment
In January 2009, we shut down our CIS Technical Solutions
division (CIS division) which provided technical
services to improve the productivity of automated assembly
lines. Technical services provided included robot programming,
process improvement, systems integration and production support
which sales and related expenses would have been presented as
part of our Advanced segment. The results of this segment have
been presented as discontinued operations for the respective
years ended April 30, 2009, 2008 and 2007.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2009
|
|
|
% Change 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Versus 2008
|
|
|
Versus 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
28,971
|
|
|
$
|
28,196
|
|
|
$
|
34,096
|
|
|
|
3
|
%
|
|
|
(17
|
)%
|
% of total company sales
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
16
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Gross Margin
|
|
|
8,459
|
|
|
|
4,944
|
|
|
|
8,969
|
|
|
|
71
|
%
|
|
|
(45
|
)%
|
Gross Margin as % of sales
|
|
|
29
|
%
|
|
|
18
|
%
|
|
|
26
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
2,514
|
|
|
|
3,439
|
|
|
|
4,249
|
|
|
|
(27
|
)%
|
|
|
(19
|
)%
|
Research and Engineering
|
|
|
1,115
|
|
|
|
2,156
|
|
|
|
2,366
|
|
|
|
(48
|
)%
|
|
|
(9
|
)%
|
General and Administrative
|
|
|
3,133
|
|
|
|
4,439
|
|
|
|
3,839
|
|
|
|
(29
|
)%
|
|
|
16
|
%
|
Restructuring Charges and Other
|
|
|
1,969
|
|
|
|
0
|
|
|
|
0
|
|
|
|
NM
|
|
|
|
NM
|
|
Total Operating Expenses
|
|
|
8,731
|
|
|
|
10,034
|
|
|
|
10,454
|
|
|
|
(13
|
)%
|
|
|
(4
|
)%
|
Operating Loss
|
|
|
(272
|
)
|
|
|
(5,090
|
)
|
|
|
(1,485
|
)
|
|
|
NM
|
|
|
|
NM
|
|
Results of Discontinued Operations, net of Tax of $0, $230, and
$236
|
|
|
(733
|
)
|
|
|
443
|
|
|
|
418
|
|
|
|
NM
|
|
|
|
6
|
%
|
NM = Not Meaningful
Fiscal
year 2009 compared to fiscal year 2008
Sales in the Advanced segment will vary period over period for
various reasons, such as the timing of contract awards, timing
of project design and manufacturing schedule, and the timing of
shipments to customers.
In fiscal year 2009, sales in our Advanced segment increased by
$775,000 or 3%. This increase is primarily due to the timing of
revenue recognition for some of our aerospace contracts which
were in the project design phase during the first half of the
current fiscal year. We anticipate continued increase in sales
in the Advanced segment in future periods based on our current
backlog of $32.5 million as of April 30, 2009. Backlog
includes firm orders for which written authorizations have been
accepted and revenue has not yet been recognized.
Gross margin in fiscal year 2009, amounted to $8.5 million
or 29% compared to $4.9 million or 18% of sales in the
prior year comparative period. The improvement in gross margin
as a percentage of sales when compared to the prior year
comparative period is attributable to improved contract pricing
and labor efficiencies from consolidating the manufacturing for
all our advanced systems in our Jeffersonville, Indiana facility.
Excluding the impact of Restructuring Charges and Other,
operating expenses in the Advanced segment declined by
$3.3 million or 33% in fiscal year 2009 primarily as a
result of the reduction in staff in this segment following the
closure of our manufacturing facility in Burlington, Ontario.
Fiscal
year 2008 compared to fiscal year 2007
In fiscal year 2008:
Sales decreased $5.9 million or 17% over the prior year and
constituted 12% of total sales. Sales in the advanced segment
will fluctuate year over year for various reasons such as the
timing of contract awards, timing of project design and
manufacturing schedule, shipment to the customers, and finally
installation of the system. The decline when compared to the
prior year was due to delayed aerospace contract awards.
Excluding the impact of foreign currency changes, sales
decreased $7.7 million or 23% compared to fiscal year 2007.
Gross margin for the year ended April 30, 2008, amounted to
$4.9 million or 18% of sales compared to $9.0 million
or 26% of sales in the prior year. The comparative percentage
margin decline is
23
attributable to expenses mainly as a result of inventory
write-downs of $740,000 and severance costs of $234,000 incurred
related to the cessation of the pursuit of non-waterjet
automation systems. Excluding the impact of foreign currency
changes, gross margin decreased $4.3 million over the prior
year.
Operating expense changes consisted of the following:
|
|
|
|
|
A decrease in sales and marketing expenses of $810,000 or 19%
primarily due to lower customer support costs driven by lower
aerospace sales when compared to the prior year offset by bad
debt expenses of $413,000 during the current year related to
non-waterjet automation customers;
|
|
|
|
A reduction in research and engineering expenses of $210,000 or
9% as a result of a reduction in staff during the year; and
|
|
|
|
An increase in general and administrative expenses of $600,000
or 16% attributable to higher management fee allocation in the
current year when compared to the prior year as well as
severance costs taken during the year.
|
|
|
|
Excluding the impact of foreign currency changes, operating
expenses decreased $2.3 million over the prior year.
|
All
Other
Our All Other category includes corporate overhead expenses as
well as general and administrative expenses related to inactive
entities that do not constitute operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2009
|
|
|
% Change 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Versus 2008
|
|
|
Versus 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
$
|
14,927
|
|
|
$
|
17,996
|
|
|
$
|
21,028
|
|
|
|
(17
|
)%
|
|
|
(14
|
)%
|
Provision for Litigation
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
NM
|
|
|
|
NM
|
|
Restructuring Charges and Other
|
|
|
3,865
|
|
|
|
|
|
|
|
|
|
|
|
NM
|
|
|
|
NM
|
|
Goodwill Impairment
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
NM
|
|
|
|
NM
|
|
NM = Not Meaningful
Fiscal
year 2009 compared to fiscal year 2008
In fiscal year 2009:
General and administrative expenses in our All Other category
decreased by $3.1 million compared to the prior year. The
decrease in fiscal year 2009 was attributable to lower
performance award expenses in the current year. The prior year
amount also included $2.9 million related to compensation
expenses to amend our former CEOs contract.
We recorded a $29 million provision related to the patent
litigation with OMAX during the current fiscal year pursuant to
a Settlement and Cross Licensing Agreement which is discussed in
Note 4 Discontinued Operations, Mergers and
Investments and Note 15 Commitments and
Contingencies of the Notes to the Condensed Consolidated
Financial Statements included in Item 8, Financial
Statements and Supplementary Data. With the decision to
abandon the OMAX acquisition in May 2009, a portion of the
amount payable to OMAX will be funded through the issuance of a
subordinated promissory note with a face value of
$6 million.
Restructuring and Other charges in this category included an
expense of $3.8 million related to previously deferred
direct transaction costs which had been capitalized as part of
the anticipated acquisition cost of OMAX under SFAS 141.
These deferred direct transaction costs were expensed in the
fourth quarter of fiscal year 2009 as it was deemed probable
that the contemplated merger OMAX would not close prior to the
adoption of SFAS 141R on May 1, 2009. Refer to an
update on the contemplated
24
merger with OMAX at Note 4 Discontinued
Operations, Mergers and Investments of the Notes to the
Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data.
Further, our results in fiscal year 2009 also include a non-cash
goodwill impairment charge of $2.8 million, which
represented the carrying value of all of our goodwill. This
charge was recognized due to a combination of factors, including
the current economic environment which has resulted in a
significant decline in the results of our operations and the
sustained period of decline in our market capitalization. Refer
to further detail on our goodwill assessment for fiscal year
2009 in Note 10 Goodwill of the Notes to
the Condensed Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data.
Fiscal
year 2008 compared to fiscal year 2007
In fiscal year 2008:
General and administrative expenses decreased by
$3.0 million or 14% primarily due to lower professional
fees for legal, audit and Sarbanes Oxley related compliance
costs which were $5.4 million in fiscal year 2008 compared
to $8.9 million in the prior year.
Other
(Income) Expense
Interest
Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2009
|
|
|
% Change 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Versus 2008
|
|
|
Versus 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
494
|
|
|
$
|
780
|
|
|
$
|
838
|
|
|
|
(37
|
)%
|
|
|
(7
|
)%
|
Interest Expense
|
|
|
(1,562
|
)
|
|
|
(419
|
)
|
|
|
(409
|
)
|
|
|
273
|
%
|
|
|
2
|
%
|
Our interest income was $494,000, $780,000, and $838,000 for the
respective years ended April 30, 2009, 2008 and 2007. The
decrease in fiscal year 2009 compared to fiscal year 2008 was
mainly as a result of lower average cash balances and interest
rates in investment accounts during the current year.
Additionally, we wrote off $114,000 of accrued interest due from
the Purchaser of Avure following an agreement with the Purchaser
in fiscal year 2009 that only the principal amount on the note
outstanding from the sale of the Avure Business would be paid.
The moderate decrease in interest income in fiscal year 2008
when compared to fiscal year 2007 results from a moderate
decline in average cash balances during fiscal year 2008 while
the increase in fiscal year 2007 when compared to fiscal year
2006 was primarily a result of an increase in average invested
cash balances in fiscal year 2007.
Our interest expense was $1.6 million, $419,000, and
$409,000 for the respective years ended April 30, 2009,
2008 and 2007. The significant increase in interest expense in
fiscal year 2009 when compared to fiscal year 2008 was primarily
as a result of the following:
|
|
|
|
|
write-off of $654,000 of deferred financing fees upon the
execution of an amendment to our Line of Credit Agreement in
March 2009 which reduced our available borrowing capacity from
$100 million to $40 million;
|
|
|
|
amortization of deferred financing fees over the life of the
Line of Credit availability which amortization began in June
2008 upon the execution of the original Line of Credit Agreement
with our Senior Lenders; and
|
|
|
|
an increase in interest charged on outstanding standby letters
of credit which increased from $2.2 million at the end of
fiscal year 2008 to $7.1 million by the end of fiscal year
2009. This increase was as a result of the timing of milestone
payments from customers in our Advanced segment.
|
Interest expense in fiscal 2008 was comparable to fiscal year
2007.
25
Other
Income (Expense), Net
Our Other Income (Expense), net in the Consolidated Statement of
Operations is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Realized Foreign Exchange Gains (Losses), net
|
|
$
|
74
|
|
|
$
|
1,759
|
|
|
$
|
213
|
|
Unrealized Foreign Exchange Gains (Losses), net
|
|
|
(1,571
|
)
|
|
|
(2,904
|
)
|
|
|
1,827
|
|
Miscellaneous Income (Expense)
|
|
|
883
|
|
|
|
(72
|
)
|
|
|
88
|
|
Premium on Repurchase of Warrants
|
|
|
|
|
|
|
(629
|
)
|
|
|
|
|
Hedging Costs
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(614
|
)
|
|
$
|
(1,846
|
)
|
|
$
|
1,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended April 30, 2009, we recorded Other
Expense, net of $614,000 compared to Other Expense, net of
$1.8 million and Other Income, net of $1.9 million for
the year ended April 30, 2008 and 2007, respectively. These
changes primarily resulted from the fluctuation in realized and
unrealized foreign exchange gains and losses.
Miscellaneous income in fiscal year 2009 included royalty income
of $418,000, net of settlement costs of $500,000, from the
license of certain patents and $318,000 from a stockholder in
settlement of a claim under Section 16(b) of the Exchange
Act.
In fiscal year 2008, we repurchased 403,300 warrants from
certain funds managed or advised by Third Point LLC for an
aggregate purchase price of $3 million. The cash paid in
excess of the fair market value of those warrants on the
repurchase date of $629,000 was recorded as an Other Expense in
fiscal year 2008.
The hedging costs recorded in fiscal year 2007 were related to
cancelled hedges on derivative instruments that had been
negotiated to mitigate the currency fluctuation risk of two
significant aerospace contracts denominated in Euro that were
subsequently cancelled prior to their completion.
Income
Taxes
Our (benefit)/provision for income taxes for our continuing
operations over the last three years consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2009
|
|
|
% Change 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Versus 2008
|
|
|
Versus 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Current Tax Expense
|
|
$
|
1,470
|
|
|
$
|
4,475
|
|
|
$
|
2,792
|
|
|
|
(67
|
)%
|
|
|
60
|
%
|
Deferred Tax (Benefit) Expense
|
|
|
(9,700
|
)
|
|
|
(11,092
|
)
|
|
|
194
|
|
|
|
(13
|
)%
|
|
|
NM
|
|
NM = Not Meaningful
Under Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, we recognize a net deferred
tax asset for items that will generate a reduction in future
taxable income to the extent that it is more likely than
not that these deferred assets will be realized. A
valuation allowance is provided when it is more likely than not
that some portion or all of a deferred tax asset will not be
realized. The ultimate realization of deferred tax assets
depends on the generation of future taxable income during the
period in which the tax benefit will be realized. Deferred tax
assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which the
tax benefit will be realized. In determining the realizability
of these assets, we considered numerous factors, including
historical profitability, estimated future taxable income and
the industry in which we operate. In fiscal year 2008, we
reversed approximately $17.2 million and $1 million of
valuation allowance against deferred tax assets related to
U.S. and Germany net operating loss (NOL) carryforwards and
other net deferred tax assets, respectively, after concluding
that it was more likely than not that these benefits would be
realized based on cumulative positive results of
26
operations and anticipated future profit levels. At
April 30, 2009, the recorded amount of our deferred tax
assets was $20 million, net of valuation allowance on
certain foreign NOLs.
Our foreign tax provision consists of current and deferred tax
expense. The United States tax provision consists of current and
deferred tax expense (benefit), state taxes and foreign
withholding taxes. We do not permanently defer undistributed
earnings of certain foreign subsidiaries. In the current year we
repatriated $1.6 million, net of $329,000 withholding tax
from these foreign subsidiaries and we plan to continue
repatriating additional funds in the future.
In fiscal year 2008, the foreign tax provision consisted of
current and deferred tax expense. The United States tax
provision consisted primarily of federal alternative minimum
tax, state taxes, and accrued foreign withholding taxes. We
recorded a $304,000 liability for withholding taxes payable on
future repatriation of foreign earnings in fiscal year 2008. In
fiscal year 2008, we repatriated $9.8 million, net of tax
of $885,000 million from two foreign subsidiaries.
The fiscal year 2007 tax provision consisted of current and
deferred expense related to operations in foreign jurisdictions
which were profitable, primarily in Taiwan and Germany. In
addition, operations in certain jurisdictions (principally
Canada and the United States) reported net operating losses
for which no tax benefit was recognized as it was more likely
than not that such benefit would not be realized at that time.
In fiscal year 2007, we repatriated $8.0, net of tax of
$1.4 million from certain foreign subsidiaries.
Liquidity
and Capital Resources
Sources
of Cash
Historically, our most significant sources of financing have
been funds generated by operating activities, available cash and
cash equivalents and available lines of credit. From time to
time, we have borrowed funds from our available revolving credit
facility.
Cash
Generated by Operating Activities
Cash used in operating activities was $6.5 million for year
ended April 30, 2009, compared to $14.0 million
generated in the year ended April 30, 2008. This decrease
was mainly attributable to lower revenue in fiscal 2009, as well
as the timing of payments to vendors as well as payments for
Restructuring and Other charges.
Available
Cash and Cash Equivalents
At April 30, 2009 we had total cash and cash equivalents of
$10.1 million, of which approximately $6.1 million was
held by our
non-U.S. subsidiaries.
To the extent that our cash needs in the U.S. exceed our
cash reserves and availability under our senior secured credit
facility, we may repatriate some cash from certain of our
foreign subsidiaries that we have previously repatriated cash
from. This could be limited by our ability to repatriate such
cash in a tax efficient manner. We believe that our existing
cash and cash equivalents as of April 30, 2009, expected
funds generated from our operations, and financing available
under our existing credit facilities will be sufficient to fund
our operations for at least the next twelve months. However, in
the event that there are changes in our expectations or
circumstances, we may need to raise additional funds through
public or private debt or sale of equity to fund our operations.
Subsequent to the end of fiscal year 2009, we filed a
registration statement on
Form S-3
filed with the SEC covering the offer and sale, at our
discretion, of up to $35 million in common and preferred
stock, warrants, and units. This registration statement has not
yet been declared effective by the SEC.
Refer to Part II, Item 1A: Risk Factors for a
discussion of the risks and uncertainties pertaining to our
business and industry.
27
Credit
Facilities and Debt
On March 10, 2009, we amended our Credit Facility Agreement
to reduce our Line of Credit amount from $65 million to
$40 million and to amend certain definitions of our
covenants to exclude the $29 million provision for the
patent litigation with OMAX from our Earnings Before Interest,
Taxes, Depreciation and Amortization (EBITDA) for
the quarter ended January 31, 2009. Following this
amendment, we borrowed $15 million of the funds available
from our Line of Credit to fund the payment of amounts due to
OMAX upon the simultaneous execution of the Settlement and Cross
Licensing Agreement which is detailed in
Note 15 Commitments and Contingencies
and an amendment to the Merger Agreement which is detailed
in Note 4 Discontinued Operations, Mergers
and Investments.
We subsequently amended our Credit Facility Agreement on
June 10, 2009 which amends the maturity date of the line as
well as certain financial covenants that we are required to
maintain. Under the amended covenants, we must maintain a
minimum Consolidated Adjusted EBITDA of $8 million through
the second quarter of fiscal 2011 and $10 million
thereafter, based on the most recent four fiscal quarters.
Consolidated Adjusted EBITDA is calculated as the amount equal
to Consolidated Net Income for such period plus interest, income
taxes, depreciation and amortization and other non-cash and
certain other allowable adjustments as specifically defined in
the credit agreement; including the $29 million provision
for patent litigation recorded in the third quarter of fiscal
year 2009. The minimum Consolidated Adjusted EBITDA required
prior to this amendment was $20 million. The facility also
has a minimum Fixed Charge Coverage Ratio of Consolidated
Adjusted EBITDA to interest charges, cash tax and debt payments
during the most recent four quarters of 3 to 1 which replaces
the previous Consolidated Interest Coverage Ratio. The amendment
also revises the Consolidated Leverage Ratio which is the ratio
of consolidated indebtedness to Consolidated Adjusted EBITDA for
the four most recent fiscal quarters to 1.75 to 1 during the
fourth quarter of fiscal 2009, 2.85 to 1 for the first half of
fiscal 2010, 2.25 to 1 in the third quarter of fiscal 2010 and 2
to 1 thereafter. A violation of the covenants, including the
financial covenants, would result in event of default and
accelerate the repayment of all unpaid principal and interest
and the termination of any letters of credit. The maturity date
of this Line of Credit was also amended to June 10, 2011.
Our leverage ratio, fixed charge coverage ratio, and our minimum
rolling four fiscal quarters Consolidated Adjusted EBITDA were
1.52, 6.6 and $16.9 million, respectively, for the quarter
ended April 30, 2009. Our calculations of these financial
ratios are reported in Exhibit No. 99.1 of this Annual
Report on
Form 10-K.
We were in compliance with all our financial covenants as of
April 30, 2009, as amended.
We expect to be in compliance with our covenants pursuant to the
Credit Facility Agreement for at least the next twelve months.
However, in the event that there is a possibility of default, we
may institute additional cost reductions, raise additional funds
through public or private debt or sale of equity; possibly seek
further amendments to our Credit Facility Agreement or a
combination of these items. Refer to Part II, Item 1A:
Risk Factors for discussion of the risks and uncertainties
pertaining to our business and industry.
Interest on the Line of Credit is based on the banks prime
rate or LIBOR rate plus a percentage spread between 1.75% and
3.75% depending on whether we use the banks prime rate or
LIBOR rate and our current leverage ratios. We also pay an
annual letter of credit fee equal to 1.25% of the amount
available to be drawn under each outstanding letter of credit.
The annual letter of credit fee is payable quarterly in arrears
and varies depending on our leverage ratio.
As of April 30, 2009, we had $19.9 million available
under our Line of Credit, net of $7.1 million in
outstanding letters of credit.
We also have three unsecured credit facilities in Taiwan with a
commitment totaling $4.0 million at April 30, 2009,
bearing interest at 2.80% per annum. At April 30, 2009, all
the credit facilities will mature within one year and the
balance outstanding under these credit facilities amounts to
$2.2 million, which is shown under Notes Payable in the
Consolidated Financial Statements.
We have an outstanding seven-year collateralized long-term
variable rate loan, expiring in 2011, bearing interest at an
annual rate of 3.67% as of April 30, 2009. The loan is
collateralized by our manufacturing facility in Taiwan. The
outstanding balance on this loan was $1.9 million as of
April 30, 2009.
28
Other
Sources of Cash
In addition to cash and cash equivalents, cash from operations
and cash available under our credit facilities, we also generate
cash from the exercise of stock options. Cash received from the
exercise of stock options was $1.2 million for the year
ended April 30, 2008. There were no option exercises during
fiscal year 2009.
Uses
of Cash
Capital
Expenditures
Our capital spending plans currently provide for outlays ranging
from approximately $6 million to $8 million over the
next twelve months, primarily related to the completion of
Enterprise Resource Planning system as well as patent and
trademark maintenance. It is expected that funds necessary for
these expenditures will be generated internally or from
available financing. To the extent that funds cannot be
generated through operations or we are unable to obtain
financing on reasonable terms, we will reduce our capital
expenditures accordingly. Our capital spending for the year
ended April 30, 2009 and 2008 amounted to $8.9 million
and $6.3 million, respectively
Other
Strategic Investments
As discussed in Note 4 Discontinued
Operations, Mergers and Investments of the Notes to the
Condensed Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data,
on January 5, 2009, we entered into an equity purchase
agreement in which we acquired a minority interest in Dardi
International (Dardi), a waterjet manufacturer based
in China, for $2 million in cash. Additionally, we incurred
$1.7 million in direct costs attributed to the acquisition.
We accounted for the $3.7 million investment in Dardi using
the cost method. This investment has been classified as an Other
Long-Term Asset on the Consolidated Balance Sheet.
As discussed above, we made the decision to terminate our option
to acquire OMAX in May 2009 following a thorough investigation
of financing alternatives to complete the merger and
unsuccessful attempts to negotiate a lower purchase price. Refer
to Note 4 Discontinued Operations, Mergers
and Investments of the Notes to the Condensed Consolidated
Financial Statements included in Item 8, Financial
Statements and Supplementary Data for further details on the
contemplated merger with OMAX including the execution of a
Settlement and Cross Licensing Agreement with OMAX for
$29 million payable to OMAX, of which $23 million had
been funded as of April 30, 2009, and the anticipated
charge that will be recorded in the first quarter of fiscal year
2010 in connection with the termination of the Merger Agreement.
Repayment
of Debt and Notes Payable
Our total repayment of debt and notes payable were
$2.8 million and $7.4 million for the year ended
April 30, 2009 and 2008, respectively.
Repurchase
of Warrants
In October 25, 2007, in a privately negotiated transaction,
we purchased from certain funds managed or advised by Third
Point LLC (collectively, Third Point) outstanding
warrants that gave Third Point the right until March of 2010 to
purchase 403,300 of our common stock at an exercise price of
$4.07 per share (the Warrants). Third Point
purchased the Warrants, together with shares of commons stock,
in our March 2005 Private Investment Public Equity transaction
(the PIPE Transaction). The Warrants were
repurchased from Third Point in connection with our previously
announced program to repurchase up to $45 million of the
Companys securities. The Warrants were repurchased at a
price of $7.43 per Warrant for an aggregate purchase price of
$3 million.
29
Disclosures
about Contractual Obligations and Commercial
Commitments
The following table summarizes our known future payments
pursuant to certain contracts as of April 30, 2009 and the
estimated timing thereof. More detail about our contractual
obligations and commercial commitments are in
Note 13 Long-term Obligations and Notes
Payable and Note 15 Commitments and
Contingencies of the Notes to the Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Fiscal Year
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating Leases
|
|
$
|
3,284
|
|
|
$
|
2,264
|
|
|
$
|
1,534
|
|
|
$
|
834
|
|
|
$
|
69
|
|
|
$
|
383
|
|
|
$
|
8,368
|
|
Long-term Debt, Notes Payable & Capital Leases
|
|
|
3,651
|
|
|
|
1,395
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,600
|
|
Interest on Long-term Debt and Notes Payable(1)
|
|
|
775
|
|
|
|
718
|
|
|
|
707
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
2,259
|
|
Purchase Commitments(2)
|
|
|
23,299
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,359
|
|
Notes issuable to OMAX Corporation(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,824
|
|
|
|
|
|
|
|
10,824
|
|
License Agreements
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
Consulting Agreements
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,250
|
|
Liabilities related to Unrecognized Tax benefits, including
Interest and Penalties(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,679
|
|
|
|
8,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,600
|
|
|
$
|
4,437
|
|
|
$
|
2,795
|
|
|
$
|
893
|
|
|
$
|
10,893
|
|
|
$
|
9,062
|
|
|
$
|
61,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts presented for interest payments assume that all
long-term debt obligations outstanding as of April 30, 2009
will remain outstanding until maturity, and interest on
variable-rate debt in effect as of April 30, 2009 will
remain in effect until maturity. |
|
(2) |
|
Purchase obligations include agreements to purchase goods or
services that are enforceable, are legally binding and specify
all significant terms, including fixed or minimum quantities to
be purchased; fixed, minimum or variable price provisions; and
the approximate timing of the transaction. Purchase obligations
do not include agreements that are cancelable without penalty.
Additionally, although they are not legally binding agreements,
open purchase orders for inventory purchases are included in the
table above. Substantially all open purchase orders are
fulfilled within 30 days. We expect to fund these
commitments with existing cash and our cash flows from
operations in future periods. |
|
(3) |
|
Portion of amount payable to OMAX upon the execution of a
Settlement and Cross Licensing Agreement in March 2009 and
payable to OMAX in connection with the termination of the Merger
Agreement, which will be funded through the issuance of two
subordinated promissory notes with face values of
$6 million and $4 million in the first quarter of
fiscal year 2010. Pursuant to the Settlement and Cross Licensing
Agreement and the separate Merger Agreement, these promissory
notes will bear interest at a compounded annual rate of 2% with
accumulated interest and principal payable in August 2013. As
the stated interest rate on the two notes of 2% is below our
incremental borrowing rate, we will discount these notes upon
issuance and record the subsequent amortization of the discount
on the notes to interest expense. |
|
(4) |
|
We have unrecognized tax benefits of $8.7 million
associated with uncertain tax positions as of April 30,
2009. This potential liability may result in cash payments to
tax authorities. The timing of payments related to these
obligations is uncertain; however, none of this amount is
expected to be paid within the next twelve months. |
Off-Balance
Sheet Arrangements
As of April 30, 2009, the Company had no off-balance sheet
arrangements.
30
Critical
Accounting Estimates
Our discussion and analysis of the financial condition and
results of operations are based upon the consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements
requires us to make certain assumptions and estimates about
future events, and apply judgments that affect the reported
amount of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the
date of our consolidated financial statements. We base our
assumptions, estimates, and judgment on historical experience,
current trends and other factors which management believes to be
relevant and appropriate at the time our consolidated financial
statements are prepared. On a regular basis, management reviews
its assumptions, estimates, and judgments to ensure that our
consolidated financial statements are presented fairly. However,
because future events cannot be determined with certainty,
actual results may differ from our assumptions and estimates,
and such differences could be material.
Our significant accounting policies are summarized in
Item 8 Note 1, The Company and Summary
of Significant Accounting Policies, to the Consolidated
Financial Statements. Management identifies its most critical
accounting policies as those that are the most pervasive and
important to the portrayal of the Companys financial
position and results of operations, and that require the most
difficult, subjective
and/or
complex judgments by management regarding estimates that are
inherently uncertain.
|
|
|
|
|
Accounting Policy
|
|
|
|
Judgments/Uncertainties Affecting Application
|
|
Goodwill and Other Intangible Assets
|
|
|
|
Estimated useful lives for finite-lived intangible assets
|
|
|
|
|
Judgment about impairment triggering events
|
|
|
|
|
Estimates of a reporting units fair value
|
Impairment of Long Lived Assets
|
|
|
|
Judgment about triggering events
|
|
|
|
|
Recoverability of investments through future operations
|
|
|
|
|
Estimated useful lives of assets
|
|
|
|
|
Estimates of future cash flows
|
Valuation of Deferred Tax Assets and Uncertain Tax Positions
|
|
|
|
Ability of tax authority decisions to withstand legal challenges
and appeals
|
|
|
|
|
Anticipated future decisions of tax authorities
|
|
|
|
|
Application of tax statutes and regulations to transactions
|
|
|
|
|
Ability to utilize tax benefits through carrybacks to prior
periods and carryforwards to future periods
|
Contingencies
|
|
|
|
Judgment about likelihood of event(s) occurring
|
|
|
|
|
Estimated financial impact of event(s)
|
|
|
|
|
Regulatory and political environments and requirements
|
Revenue Recognition
|
|
|
|
Judgment regarding fair value in multiple element arrangements
|
|
|
|
|
Estimates about anticipated contract costs and progress made
towards the completion of projects
|
Inventory Reserves
|
|
|
|
Judgment regarding inventory aging, forecasted consumer demand,
the promotional environment and technological obsolescence
|
|
|
|
|
Application of judgment regarding historical results and current
inventory loss trends
|
Cost Method Investments
|
|
|
|
Judgment about fair value
|
|
|
|
|
Recoverability of investments
|
31
Goodwill
and Other Intangible Assets
SFAS No. 142 Goodwill and Other Intangible
Asset (SFAS 142) requires that goodwill
be tested for impairment between annual tests if an event occurs
or circumstances change that would more likely than not reduce
their fair value below their carrying amount. Our market
capitalization has been significantly impacted by the extreme
volatility in the U.S. equity and credit markets and was
trading below the book value of shareholders equity for
majority of the last six months of fiscal year 2009. As a
result, we evaluated whether the decrease in the market
capitalization reflected factors that would more likely than not
reduce the fair value of our reporting units below their
carrying value. Based on a combination of factors, including the
current economic environment which has resulted in a significant
decline in the results of our operations and the sustained
period of decline in market capitalization, we concluded that
there were sufficient indicators to perform an interim
impairment test. We follow a two step process for impairment
testing of goodwill. The first step of this test, used to
identify potential impairment, compares the fair value of a
reporting unit with our carrying amount, including goodwill. The
second step, if necessary, measures the amount of the
impairment, by calculating an implied fair value of goodwill.
The implied fair value of goodwill is determined in a manner
similar to the amount of goodwill calculated in a business
combination, by measuring the excess of the estimated fair
value, as determined in the first step, over the aggregate
estimated fair values of the individual assets, liabilities and
identifiable intangibles.
The goodwill impairment analysis under the requirements of
SFAS 142 is performed at the reporting unit level. A
reporting unit is defined as the same as or one level below an
operating segment as defined in SFAS No. 131
Disclosures About Segments of an Enterprise and Related
Information (SFAS 131). Our reporting
units for the purposes of the goodwill impairment analysis are
Standard and Advanced.
The first step of our fiscal 2009 impairment
analysis which was conducted during the reporting
period ended January 31, 2009 based on triggering events
which indicated that impairment may exist utilized
the income approach, which estimates the fair value based on the
future discounted cash flows. This was the same valuation
technique used in our annual fiscal 2008 impairment analysis.
The key assumptions used to determine the fair value of our
reporting units during this impairment analysis were:
(a) expected cash flow for a period of 5 years;
(b) terminal value based upon terminal growth rates of
between 3% and 5%; and (c) a discount rate of 15% which was
based on our best estimate of the weighted average cost of
capital adjusted for risks associated with the reporting units.
We believe the assumptions used in the fiscal 2009 impairment
analysis are consistent with the risk inherent in the business
models of the reporting units and within our industry. Based on
the first step of this analysis, we determined that the fair
value of both our reporting units, were in excess of their
carrying value.
Although the first step of the two step testing process for the
impairment of our goodwill using the income approach indicated
that the fair value of goodwill exceeded its recorded carrying
value as of January 31, 2009, as a result of recent
substantial volatility in the capital markets, our stock price
and market value had decreased significantly as of
January 31, 2009. We therefore determined that it was
appropriate to use a market approach to perform a comparison of
the carrying value of its reporting units to its market
capitalization, after appropriate adjustments for control
premium and other considerations. Using this approach, our
market capitalization was determined to be significantly less
than the net book value (i.e., stockholders equity as
reflected in our financial statements) of each reporting unit.
Based on this condition, we performed the second step of the two
step testing which consisted of a hypothetical valuation of all
the tangible and intangible assets of the reporting units. Based
on this second step analysis, we concluded that the goodwill in
each of our reporting units was impaired and recorded a non-cash
expense, of $2.8 million in fiscal year 2009.
Impairment
of Long Lived Assets
We routinely consider whether indicators of impairment of our
property and equipment assets, particularly our manufacturing
equipment, are present. If such indicators are present, we
determine whether the sum of the estimated undiscounted cash
flows attributable to the asset group in question is less than
their carrying value. For purposes of impairment testing,
long-lived assets are grouped at the component level, which for
us is by
32
regional locations, as this is the lowest level for which
identifiable cash flows are largely independent of the cash
flows of other assets and liabilities.
If the sum of the undiscounted cash flows attributable to the
asset group is less than the carrying value of the asset group,
an impairment loss is recognized based on the excess of the
carrying value of the asset group over its respective fair
value. Fair value is determined by discounting estimated future
cash flows, appraisals or other methods deemed appropriate. If
the asset group determined to be impaired are to be held and
used, we recognize an impairment charge to the extent the
present value of anticipated net cash flows attributable to the
asset group is less than the assets carrying value. The
fair value of the assets then becomes the assets new
carrying value, which is depreciated over the remaining
estimated useful life of the assets. In connection with the
triggering events discussed in our Goodwill and Other
Intangible Assets section above, during each reporting
period in fiscal year 2009, we reviewed our long-lived assets
and determined that none of our long-lived asset groups were
impaired. This determination was based on reviewing estimated
undiscounted cash flows for our asset groups, which were greater
than their carrying values.
The evaluation of the recoverability of long-lived assets
requires us to make significant estimates and assumptions. The
principal assumptions utilized in our estimated undiscounted
cash flows for long-lived assets include (a) revenue growth
rates ranging from -10% to 10% and (b) operating profit
ranging from -5% to 15%. For this analysis, negative revenue and
operating profit growth rates were considered in the near term
for certain asset groups based on current economic conditions.
Revenue growth rate and operating profit assumptions are
consistent with those utilized in our operating plan and
long-term financial planning process. Methodologies used for
valuing our long lived assets have not changed from prior
periods.
A 10% change in the estimates and assumptions used to calculate
the estimated undiscounted cash flows, which is a reasonable
change in our assumptions, would not result in a shortfall of
the sum of the estimated undiscounted cash flows against
carrying value for any of our asset groups tested for
impairment. We will continue to monitor circumstances and events
in future periods to determine whether additional asset
impairment testing is warranted.
Valuation
of Deferred Tax Assets and Uncertain Tax Positions
We account for uncertain tax positions in accordance with FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the
minimum recognition threshold a tax position is required to meet
before being recognized in the consolidated financial
statements. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (Step 1) occurs when
an enterprise concludes that a tax position, based solely on its
technical merits, is more likely than not to be sustained upon
examination. Measurement (Step 2) is only addressed if Step
1 has been satisfied. Under Step 2, the tax benefit is measured
at the largest amount of benefit, determined on a cumulative
probability basis that is more likely than not to be realized
upon settlement. As used in FIN 48, the term more
likely than not means that the likelihood of an occurrence
is greater than 50%. We adopted FIN 48 as of May 1,
2007. To the extent that we prevail in matters for which
unrecognized tax benefits have been established, or are required
to pay amounts in excess of our unrecognized tax benefits, our
effective tax rate in a given financial statement period could
be materially affected. An unfavorable tax settlement would
require the use of our cash and would result in an increase to
our effective income tax rate in the period of resolution. A
favorable tax settlement would be recognized as a reduction in
our effective income tax rate in the period of resolution.
Our annual effective tax rate is based on income, statutory tax
rates and tax planning strategies available in various
jurisdictions in which we operate. Tax laws are complex and
subject to different interpretations by the taxpayer and
respective governmental taxing authorities. Significant judgment
is required in determining our tax expense and in evaluating tax
positions. Tax positions are reviewed quarterly and balances are
adjusted as new information becomes available. Deferred income
tax assets and liabilities are recognized for the estimated
future tax consequences attributable to temporary differences
between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
These assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
the
33
temporary differences are expected to reverse. Future tax
benefits of tax losses and credit carryforwards are recognized
to the extent that realization of these benefits is considered
more likely than not. As of April 30, 2009, we had
approximately $37.6 million of domestic net operating loss
and $31.4 million of state net operating loss carryforwards
to offset certain earnings for federal and state income tax
purposes. These net operating loss carryforwards expire between
fiscal year 2022 and fiscal year 2026. Net operating loss
carryforwards in foreign jurisdictions amount to
$34.9 million. Most of the foreign net operating losses can
be carried forward indefinitely, with certain amounts expiring
between fiscal years 2014 and 2017. The federal, state and
foreign net operating loss carryforwards per the income tax
returns filed include uncertain tax positions taken in prior
years. Due to the application of FIN 48, the net operating
loss carryforwards per the income tax returns are larger than
the net operating loss carryforwards considered more likely than
not to be realized in recognizing deferred tax assets for
consolidated financial statement purposes. We also have a
capital loss carryover of $4.3 million which expires in
2011. Utilization of net operating losses may be subject to
limitation due to ownership changes and other limitations
provided by the Internal Revenue code and similar state
provisions. If such a limitation applies, the net operating loss
may expire before full utilization.
Our income tax returns are periodically audited by domestic and
foreign tax authorities. These audits include questions
regarding our filing tax positions, including the timing and
amount of deductions and the allocation of income among various
tax jurisdictions. At any one time, multiple tax years are
subject to audit by the various tax authorities.
Legal
Contingencies
At any time, we may be involved in certain legal proceedings.
Our policy is to routinely assess the likelihood of any adverse
judgments or outcomes related to legal matters, as well as
ranges of probable losses. A determination of the amount of the
reserves required, if any, for these contingencies is made after
thoughtful analysis of each known issue and an analysis of
historical experience. We record reserves related to certain
legal matters for which it is probable that a loss has been
incurred and the range of such loss can be estimated. Gain
contingencies are not recorded until management determines it is
certain that the future event will become or does become a
reality. Such determinations are subject to interpretations of
certain facts and circumstances, forecasts of future events, and
estimates of financial impacts of such events. Management
discloses the facts regarding material matters assessed as
reasonably possible and potential exposure, if determinable.
Costs incurred with defending claims are expensed as incurred.
As of April 30, 2009, we have accrued our estimate of the
probable liabilities for the settlement of these claims. Refer
to Note 15, Commitments and Contingencies of the
Notes to the Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data.
Because of inherent uncertainties related to these legal
matters, we base our loss accruals on the best information
available at the time. As additional information becomes
available, we reassess our potential liability and may revise
our estimates. Such revisions could have a material impact on
future quarterly or annual results of operations.
Revenue
Recognition
The Company sells ultrahigh-pressure waterjet systems. Sales of
waterjet systems within in the Standard segment are primarily
related to the Companys cutting and cleaning systems using
ultrahigh-pressure water pumps and do not require significant
custom configuration or modifications. Installation of these
waterjet systems by the Company is not essential to the
functionality of the waterjet systems but the Company does
provide installation as a separate service. Sales of waterjet
systems within the Advanced segment are generally complex
aerospace and automation systems, which require specific custom
configuration and advanced features to match unique customer
applications as well as parts and services to sustain these
installed systems. Installation by the Company is essential to
the functionality of waterjet systems sold within the Advanced
segment.
The Company recognizes revenue for sales of ultrahigh-pressure
waterjet pumps, consumables, and services, and billing for
freight charges, in accordance with SEC Staff Accounting
Bulletin No. 104
34
(SAB 104), Revenue Recognition in
Financial Statements and EITF Issue
No. 00-21
(EITF 00-21),
Revenue Arrangements with Multiple Deliverables..
Additionally, because
FlowMastertm
software, our PC-based waterjet control, is essential to the
functionality of the Companys waterjet systems, the
Company recognizes revenue on sales of waterjet systems in
accordance with Statement of Position
97-2
(SOP 97-2),
Software Revenue Recognition. Specifically, for our
waterjet systems that do not require significant modification or
customization, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title and risk of loss have
passed to the customer, the price is fixed or determinable, and
collectibility is reasonably assured, or probable in the case of
sale of waterjet systems.
Unearned revenue is recorded for products or services that have
not been provided but have been invoiced under contractual
agreements or paid for by a customer, or when products or
services have been provided but all the criteria for revenue
recognition have not been met.
We recognize revenue for delivered elements only when the
delivered elements have standalone value, fair values of
undelivered elements are known, uncertainties regarding customer
acceptance are resolved, and there are no customer-negotiated
refund or return rights affecting the revenue recognized for
delivered elements. For contract arrangements that combine
deliverables such as systems with embedded software, and
installation, each deliverable is generally considered a
separate unit of accounting or element. The consideration
received is allocated among the separate units of accounting
based on their respective fair values, and the applicable
revenue recognition criteria are applied to each of the separate
units. In cases where there is objective and reliable evidence
of the fair value of the undelivered item in an arrangement but
no such evidence for the delivered item, the residual method is
used to allocate the arrangement consideration.
In general, sales of our waterjet systems within our Standard
segment are FOB shipping point or FOB destination, depending on
geographical location, and the title passes to the customer
based on the specific terms in each contract.
For complex aerospace and automation systems designed and
manufactured to buyers specification, the Company
recognizes revenue using the percentage of completion method in
accordance with Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Typical lead times can
range from two to 18 months. Sales and profits on such
contracts are recorded based on the ratio of total actual
incurred costs to date to the total estimated costs for each
contract (the
cost-to-cost
method). Losses on contracts are recognized in the period in
which they are determined. The impact of revisions of contract
estimates is recognized as a cumulative change in estimate in
the period in which the revisions are made.
Shipping revenues and expenses are recorded in revenue and cost
of goods sold, respectively.
Valuation
of Obsolete/Excess Inventory
We currently write-down obsolete or excess parts and equipment
inventory that is no longer used due to design changes to our
products or lack of customer demand. We regularly monitor our
inventory levels and, if we identify an excess condition based
on our usage, we record a corresponding inventory reserve which
establishes a new cost basis for our inventory. Subsequent
changes in facts or circumstances do not result in the reversal
of previously recorded markdowns or an increase in that newly
established cost basis. The amount of inventory write-down
requires the use of management judgment regarding technological
obsolescence and forecasted customer demand. If estimates
regarding consumer demand are inaccurate or changes in
technology affect demand for certain products in an unforeseen
manner, we may be exposed to losses that could be material.
Valuation
of Cost Method Investments
We account for our investments in non-marketable equity
securities that do not have a readily determinable fair value
under the cost method of accounting. We regularly analyze our
portfolio cost method investments for other than temporary
declines in fair value. This analysis requires significant
judgment as well as the use of estimates and assumptions. The
primary factors considered when determining if a charge must be
35
recorded because a decline in the fair value of an investment is
other than temporary include whether: (i) the fair value of
the investment is significantly below our cost basis;
(ii) the financial condition of the issuer of the security
has deteriorated; (ii) the decline in fair value has
existed for an extended period of time; and (iii) we have
the intent and ability to retain the investment for a period of
time sufficient to allow for any anticipated recovery in market
value. As of April 30, 2009, we held one investment
accounted for under the cost method of accounting at a carrying
value of $3.7 million.
Recently
Issued Accounting Pronouncements
Refer to Note 2 Recently Issued Accounting
Pronouncements of the Notes to the Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data, for a discussion of recently issued
accounting developments.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The types of market risk we are exposed to in our normal
business activities are interest rate risk and currency exchange
risk.
Interest
Rate Risk
We are exposed to fluctuations in interest rates through our
issuance of fixed rate and variable rate debt. At April 30,
2009, we had $18.5 million in interest bearing debt and
notes payable. Of this amount, $1.9 million was variable
rate debt with an interest rate of 3.67% per annum as of
April 30, 2009 and $15.2 million was related to
borrowings under our lines of credit at variable interest rates
ranging from 2.8% to 5.0%. Refer to Note 13 Long-term
Obligations and Notes Payable of the Notes to the
Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data, for
additional contractual information on our long-term obligations
and notes payable. As of April 30, 2009, a 10% change in
variable interest rates would result in a $73,000 change in
interest expense on a rolling twelve month basis. At
April 30, 2009, we had no derivative instruments to offset
the risk of interest rate changes. We may choose to use
derivative instruments, such as interest rate swaps, caps,
collars and put or call options, to manage the risk associated
with interest rate changes in future periods.
Foreign
Currency Exchange Rate Risk
We transact business in a number of countries around the world
and as a result are exposed to changes in foreign currency
exchange rates. Costs in some countries are incurred, in part,
in currencies other than the applicable functional currency. Our
non-U.S. operations
account for approximately 58% of consolidated revenue. Based on
our results for the year ended April 30, 2009 for our
foreign subsidiaries, and based on the net position of foreign
assets less liabilities, a hypothetical near-term 10%
appreciation of the U.S. dollar against all foreign
currencies in the countries in which we have continuing
operations could positively impact operating income (expense)
and other income (expense) by approximately $217,000 and
$245,000, respectively. Conversely, a hypothetical 10%
devaluation of the U.S. dollar against all foreign
currencies in the countries in which we have continuing
operations could negatively impact operating income (expense)
and other income (expense) by approximately $265,000 and
$300,000, respectively. Our consolidated financial position and
cash flows could be similarly impacted. We selectively utilize
forward exchange rate contracts which we have not designated as
cash flow hedges to protect against the adverse effect exchange
rate fluctuations may have on foreign currency denominated
accounts receivable and accounts payable (both trade and
inter-company).
36
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The following consolidated financial statements are filed as a
part of this report:
|
|
|
|
|
|
|
Page in this
|
Index to Consolidated Financial Statements
|
|
Report
|
|
|
|
|
38
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
Financial Statement Schedules
|
|
|
|
|
|
|
|
78
|
|
37
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flow International Corporation
Kent, Washington
We have audited the accompanying consolidated balance sheets of
Flow International Corporation and subsidiaries (the
Company) as of April 30, 2009 and 2008, and the
related consolidated statements of operations,
shareholders equity and compressive income (loss), and
cash flows for each of the three years in the period ended
April 30, 2009. Our audits also included the financial
statement schedules listed in the Index at Item 15. We also
have audited the Companys internal control over financial
reporting as of April 30, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for these financial statements and
financial statement schedules, for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these
financial statements and financial statement schedules and an
opinion on the Companys internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
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. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Flow International Corporation and subsidiaries
as of April 30, 2009 and
38
2008, and the results of their operations and their cash flows
for each of the three years in the period ended April 30,
2009, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion,
such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set
forth therein. Also, in our opinion, the Company maintained, in
all material respects, effective internal control over financial
reporting as of April 30, 2009, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ Deloitte &
Touche LLP
Seattle, Washington
June 26, 2009
39
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
10,117
|
|
|
$
|
29,099
|
|
Restricted Cash
|
|
|
220
|
|
|
|
142
|
|
Receivables, net
|
|
|
32,103
|
|
|
|
33,632
|
|
Inventories
|
|
|
21,480
|
|
|
|
29,339
|
|
Deferred Income Taxes, net
|
|
|
8,686
|
|
|
|
2,889
|
|
Deferred Acquisition Costs (Note 4)
|
|
|
17,093
|
|
|
|
7,953
|
|
Other Current Assets
|
|
|
5,544
|
|
|
|
6,456
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
95,243
|
|
|
|
109,510
|
|
Property and Equipment, net
|
|
|
22,983
|
|
|
|
18,790
|
|
Intangible Assets, net
|
|
|
4,456
|
|
|
|
4,062
|
|
Goodwill (Note 10)
|
|
|
|
|
|
|
2,764
|
|
Deferred Income Taxes, net
|
|
|
17,480
|
|
|
|
15,535
|
|
Other Long-Term Assets
|
|
|
4,798
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144,960
|
|
|
$
|
151,155
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Notes Payable (Note 13)
|
|
$
|
15,226
|
|
|
$
|
1,118
|
|
Current Portion of Long-Term Obligations
|
|
|
1,367
|
|
|
|
977
|
|
Accounts Payable
|
|
|
10,215
|
|
|
|
19,516
|
|
Accrued Payroll and Related Liabilities
|
|
|
5,406
|
|
|
|
8,189
|
|
Taxes Payable and Other Accrued Taxes
|
|
|
2,276
|
|
|
|
3,617
|
|
Deferred Income Taxes
|
|
|
651
|
|
|
|
686
|
|
Deferred Revenue
|
|
|
4,649
|
|
|
|
4,980
|
|
Customer Deposits
|
|
|
3,322
|
|
|
|
4,549
|
|
Reserve for Patent Litigation (Note 4)
|
|
|
15,000
|
|
|
|
|
|
Other Accrued Liabilities
|
|
|
9,208
|
|
|
|
9,753
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
67,320
|
|
|
|
53,385
|
|
Long-Term Obligations, net
|
|
|
1,937
|
|
|
|
2,333
|
|
Deferred Income Taxes
|
|
|
5,498
|
|
|
|
7,787
|
|
Reserve for Patent Litigation (Note 4)
|
|
|
6,000
|
|
|
|
|
|
Other Long-Term Liabilities
|
|
|
1,494
|
|
|
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,249
|
|
|
|
65,091
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Series A 8% Convertible Preferred Stock
$.01 par value, 1,000,000 shares authorized, none
issued
|
|
|
|
|
|
|
|
|
Common Stock $.01 par value,
49,000,000 shares authorized, 37,704,684 and
37,589,787 shares issued and outstanding at April 30,
2009 and 2008, respectively
|
|
|
372
|
|
|
|
371
|
|
Capital in Excess of Par
|
|
|
140,634
|
|
|
|
139,007
|
|
Accumulated Deficit
|
|
|
(71,403
|
)
|
|
|
(47,584
|
)
|
Accumulated Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
Defined Benefit Plan Obligation, net of income tax of $37 and $93
|
|
|
(80
|
)
|
|
|
(280
|
)
|
Cumulative Translation Adjustment, net of income tax of $508 and
$764
|
|
|
(6,812
|
)
|
|
|
(5,450
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
62,711
|
|
|
|
86,064
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144,960
|
|
|
$
|
151,155
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Sales
|
|
$
|
210,103
|
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
Cost of Sales
|
|
|
121,775
|
|
|
|
142,549
|
|
|
|
122,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
88,328
|
|
|
|
101,710
|
|
|
|
90,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
41,170
|
|
|
|
42,272
|
|
|
|
39,478
|
|
Research and Engineering
|
|
|
8,644
|
|
|
|
8,771
|
|
|
|
9,383
|
|
General and Administrative
|
|
|
29,506
|
|
|
|
33,888
|
|
|
|
37,255
|
|
Provision for Patent Litigation
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
Goodwill Impairment
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
Restructuring and Other Operating Charges
|
|
|
6,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,962
|
|
|
|
84,931
|
|
|
|
86,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(29,634
|
)
|
|
|
16,779
|
|
|
|
4,657
|
|
Interest Income
|
|
|
494
|
|
|
|
780
|
|
|
|
838
|
|
Interest Expense
|
|
|
(1,562
|
)
|
|
|
(419
|
)
|
|
|
(409
|
)
|
Other Income (Expense), net
|
|
|
(614
|
)
|
|
|
(1,846
|
)
|
|
|
1,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Provision for Income Taxes
|
|
|
(31,316
|
)
|
|
|
15,294
|
|
|
|
7,008
|
|
(Provision) Benefit for Income Taxes
|
|
|
8,230
|
|
|
|
6,617
|
|
|
|
(2,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(23,086
|
)
|
|
|
21,911
|
|
|
|
4,022
|
|
Income (Loss) from Operations of Discontinued Operations, Net of
Income Tax of $0, $230, and $236
|
|
|
(733
|
)
|
|
|
443
|
|
|
|
418
|
|
Loss on Sale of Discontinued Operations, Net of Income Tax of
$0, $0, and $0
|
|
|
|
|
|
|
|
|
|
|
(685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(23,819
|
)
|
|
$
|
22,354
|
|
|
$
|
3,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
$
|
(0.61
|
)
|
|
$
|
0.59
|
|
|
$
|
0.11
|
|
Income (Loss) from Operations of Discontinued Operations
|
|
|
(0.02
|
)
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(0.63
|
)
|
|
$
|
0.60
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
$
|
(0.61
|
)
|
|
$
|
0.58
|
|
|
$
|
0.11
|
|
Income (Loss) from Operations of Discontinued Operations
|
|
|
(0.02
|
)
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(0.63
|
)
|
|
$
|
0.59
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
FLOW
INTERNATIONAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(23,819
|
)
|
|
$
|
22,354
|
|
|
$
|
3,755
|
|
Adjustments to reconcile Net Income (Loss) to Cash Provided by
(Used In) Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
4,343
|
|
|
|
3,974
|
|
|
|
2,981
|
|
Deferred Income Taxes
|
|
|
(9,264
|
)
|
|
|
(10,931
|
)
|
|
|
(970
|
)
|
Excess Tax Benefits from Exercise of Stock Options
|
|
|
|
|
|
|
(291
|
)
|
|
|
|
|
Premium on Warrant Repurchase
|
|
|
|
|
|
|
629
|
|
|
|
|
|
Provision for Slow Moving and Obsolete Inventory
|
|
|
675
|
|
|
|
1,307
|
|
|
|
46
|
|
Bad Debt Expense
|
|
|
1,225
|
|
|
|
1,805
|
|
|
|
1,143
|
|
Warranty Expense
|
|
|
3,415
|
|
|
|
3,589
|
|
|
|
4,306
|
|
Incentive Stock Compensation Expense
|
|
|
1,724
|
|
|
|
695
|
|
|
|
769
|
|
Loss on Sale of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
685
|
|
Unrealized Foreign Exchange Currency Losses (Gains)
|
|
|
1,571
|
|
|
|
2,904
|
|
|
|
(1,827
|
)
|
Provision for Patent Litigation
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
Goodwill Impairment
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
539
|
|
|
|
738
|
|
|
|
(784
|
)
|
Write-off and Amortization of Debt Issuance Costs
|
|
|
879
|
|
|
|
|
|
|
|
|
|
Write-off of Previously Deferred Direct Transaction Fees
|
|
|
3,767
|
|
|
|
|
|
|
|
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(1,392
|
)
|
|
|
(6,121
|
)
|
|
|
6,803
|
|
Inventories
|
|
|
5,044
|
|
|
|
(2,894
|
)
|
|
|
(3,727
|
)
|
Other Operating Assets
|
|
|
(316
|
)
|
|
|
2,066
|
|
|
|
(344
|
)
|
Accounts Payable
|
|
|
(10,494
|
)
|
|
|
790
|
|
|
|
(3,972
|
)
|
Accrued Payroll and Related Liabilities
|
|
|
(2,655
|
)
|
|
|
2,027
|
|
|
|
(1,046
|
)
|
Deferred Revenue
|
|
|
(107
|
)
|
|
|
(389
|
)
|
|
|
(1,162
|
)
|
Customer Deposits
|
|
|
(784
|
)
|
|
|
(1,671
|
)
|
|
|
(1,779
|
)
|
Payment for Patent Litigation
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
Other Operating Liabilities
|
|
|
(4,579
|
)
|
|
|
(6,610
|
)
|
|
|
(679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in) Operating Activities
|
|
|
(6,464
|
)
|
|
|
13,971
|
|
|
|
4,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for Property and Equipment
|
|
|
(8,150
|
)
|
|
|
(5,748
|
)
|
|
|
(6,477
|
)
|
Expenditures for Intangible Assets
|
|
|
(782
|
)
|
|
|
(555
|
)
|
|
|
(467
|
)
|
Cash Received in Sale of Business, Net of Cash Sold
|
|
|
|
|
|
|
|
|
|
|
995
|
|
Settlement on Sale of Avure Business
|
|
|
|
|
|
|
|
|
|
|
(985
|
)
|
Purchase of Short-term Investments
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
Proceeds from Sale of Short-term Investments
|
|
|
|
|
|
|
773
|
|
|
|
|
|
Proceeds from Sale of Property and Equipment
|
|
|
195
|
|
|
|
254
|
|
|
|
5
|
|
Payments for Contemplated OMAX Acquisition
|
|
|
(13,336
|
)
|
|
|
(7,430
|
)
|
|
|
|
|
Payments for Dardi Investment
|
|
|
(3,604
|
)
|
|
|
(78
|
)
|
|
|
|
|
Restricted Cash
|
|
|
(78
|
)
|
|
|
(142
|
)
|
|
|
|
|
Other
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used in Investing Activities
|
|
|
(25,538
|
)
|
|
|
(12,926
|
)
|
|
|
(7,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on Senior Credit Agreement
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
Borrowings on Senior Credit Agreement
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
Repayments Under Notes Payable
|
|
|
|
|
|
|
(6,616
|
)
|
|
|
(1,614
|
)
|
Borrowings Under Notes Payable
|
|
|
1,264
|
|
|
|
1,106
|
|
|
|
5,823
|
|
Repayments Under Other Financing Arrangements
|
|
|
726
|
|
|
|
|
|
|
|
|
|
Borrowings Under Other Financing Arrangements
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
Payments of Capital Lease Obligations
|
|
|
(294
|
)
|
|
|
(101
|
)
|
|
|
(49
|
)
|
Borrowings Under Capital Lease Obligations
|
|
|
771
|
|
|
|
319
|
|
|
|
|
|
Payments of Long-Term Obligations
|
|
|
(781
|
)
|
|
|
(785
|
)
|
|
|
(931
|
)
|
Proceeds from Exercise of Stock Options
|
|
|
|
|
|
|
1,198
|
|
|
|
2,494
|
|
Excess Tax Benefits from Exercise of Stock Options
|
|
|
|
|
|
|
291
|
|
|
|
|
|
Payments for Debt Issuance Costs
|
|
|
(1,364
|
)
|
|
|
|
|
|
|
|
|
Payments for Warrants Repurchase
|
|
|
|
|
|
|
(3,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in) Financing Activities
|
|
|
13,129
|
|
|
|
(7,598
|
)
|
|
|
5,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Changes in Exchange Rates
|
|
|
(109
|
)
|
|
|
(2,636
|
)
|
|
|
(128
|
)
|
Increase (Decrease) in Cash And Cash Equivalents
|
|
|
(18,982
|
)
|
|
|
(9,189
|
)
|
|
|
2,114
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
29,099
|
|
|
|
38,288
|
|
|
|
36,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
10,117
|
|
|
$
|
29,099
|
|
|
$
|
38,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,419
|
|
|
$
|
341
|
|
|
$
|
229
|
|
Income Taxes
|
|
|
2,557
|
|
|
|
6,961
|
|
|
|
6,495
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonmonetary exchange of assets
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Issuance of compensatory common stock on executive incentive
compensation plan
|
|
|
|
|
|
|
|
|
|
|
884
|
|
Accounts Payable incurred to acquire Property and Equipment, and
Intangible Assets
|
|
|
2,352
|
|
|
|
745
|
|
|
|
961
|
|
Accrued Liabilities incurred for Pending Acquisition
|
|
|
|
|
|
|
445
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
FLOW
INTERNATIONAL CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Par
|
|
|
in Excess
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
of Par
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances, May 1, 2006
|
|
|
36,943
|
|
|
$
|
364
|
|
|
$
|
137,337
|
|
|
$
|
(73,150
|
)
|
|
$
|
(7,999
|
)
|
|
$
|
56,552
|
|
Cumulative effect of the adoption of 123R
|
|
|
|
|
|
|
|
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
(313
|
)
|
Components of Comprehensive Income in 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,755
|
|
|
|
|
|
|
|
3,755
|
|
Reclassification Adjustment for Settlement of Cash Flow Hedges,
net of income tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273
|
|
|
|
273
|
|
Cumulative Translation Adjustment, net of Income Tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of the adoption of FAS 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
(201
|
)
|
Exercise of Warrants & Options
|
|
|
168
|
|
|
|
2
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
Stock Compensation
|
|
|
157
|
|
|
|
1
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, May 1, 2007
|
|
|
37,268
|
|
|
$
|
367
|
|
|
$
|
139,207
|
|
|
$
|
(69,395
|
)
|
|
$
|
(8,955
|
)
|
|
$
|
61,224
|
|
Cumulative effect upon adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(543
|
)
|
|
|
|
|
|
|
(543
|
)
|
Components of Comprehensive Income in 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,354
|
|
|
|
|
|
|
|
22,354
|
|
Defined Benefit Pension Plan Adjustment, net of Income Tax of $25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
(80
|
)
|
Cumulative Translation Adjustment, net of Income Tax of $764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,305
|
|
|
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Options
|
|
|
252
|
|
|
|
3
|
|
|
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
1,198
|
|
Tax Benefit from Exercise of Stock Options
|
|
|
|
|
|
|
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
291
|
|
Repurchase of Warrants
|
|
|
|
|
|
|
|
|
|
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,380
|
)
|
Stock Compensation
|
|
|
70
|
|
|
|
1
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2008
|
|
|
37,590
|
|
|
$
|
371
|
|
|
$
|
139,007
|
|
|
$
|
(47,584
|
)
|
|
$
|
(5,730
|
)
|
|
$
|
86,064
|
|
Components of Comprehensive Income in 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,819
|
)
|
|
|
|
|
|
|
(23,819
|
)
|
Defined Benefit Pension Plan Adjustment, net of Income Tax
Benefit of $(56)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
200
|
|
Cumulative Translation Adjustment, net of Income Tax Benefit of
($256)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,362
|
)
|
|
|
(1,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation
|
|
|
115
|
|
|
|
1
|
|
|
|
1,627
|
|
|
|
|
|
|
|
|
|
|
|
1,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2009
|
|
|
37,705
|
|
|
$
|
372
|
|
|
$
|
140,634
|
|
|
$
|
(71,403
|
)
|
|
$
|
(6,892
|
)
|
|
$
|
62,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
|
|
Note 1
|
The
Company and Summary of Significant Accounting
Policies:
|
Reporting
Policies
Operations
and Segments
Flow International Corporation (Flow or the
Company) designs, develops, manufactures, markets,
installs and services ultrahigh-pressure waterjet technology,
and is a leading provider of robotics and assembly equipment.
Flows ultrahigh-pressure water pumps pressurize water from
40,000 to 87,000 pounds per square inch (psi) and are integrated
with water delivery systems so that water can be used to cut or
clean material. Flows products include both standard and
specialized waterjet cutting and cleaning systems. In addition
to ultrahigh-pressure water systems, the Company provides
automation and articulation systems. The Company provides
technologically-advanced, environmentally-sound solutions to the
manufacturing, industrial and marine cleaning markets.
Effective May 1, 2008, Flow modified its internal reporting
process and the manner in which the business is managed and in
turn, reassessed its segment reporting. As a result of this
process, the Company is now reporting its operating results to
the chief operating decision maker based on market segments
which has resulted in a change to the operating and reportable
segments. Previously, the Company managed its business based on
geography. The Companys change in operating and reportable
segments from a geographic basis to market segments is
consistent with managements long-term growth strategy. The
Companys new reportable segments are Standard and
Advanced. The Standard segment includes sales and expenses
related to the Companys cutting and cleaning systems using
ultrahigh-pressure water pumps as well as parts and services to
sustain these installed systems. Systems included in this
segment do not require significant custom configuration. The
Advanced segment includes sales and expenses related to the
Companys complex aerospace and application systems which
require specific custom configuration and advanced features to
match unique customer applications as well as parts and services
to sustain these installed systems.
Financial information about the Companys segments is
included in Note 3: Business Segments.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Flow International Corporation and its wholly-owned
subsidiaries. All intercompany transactions and accounts have
been eliminated in consolidation. The Company accounts for its
investments in non-marketable equity securities of less than 20%
ownership that do not have a readily determinable fair value
under the cost method of accounting.
Foreign
Currency Translation
The financial statements of foreign subsidiaries have been
measured and translated in accordance with Statement of
Financial Accounting Standards No. 52, Foreign
Currency Translation. The local currency is the functional
currency for all operations outside of the United States. Assets
and liabilities are translated at the exchange rate in effect as
of our balance sheet date. Revenues and expenses are translated
at the average monthly exchange rates throughout the year. The
effects of exchange rate fluctuations in translating assets and
liabilities of international operations into U.S. dollars
are accumulated and reflected as a cumulative translation
adjustment in the accompanying Consolidated Statements of
Stockholders Equity. Transaction gains and losses are
included in net income (loss).
44
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net realized and unrealized foreign exchange gains and (losses)
included in Other Income (Loss) for each of the respective years
ended April 30, 2009, 2008 and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net Realized Foreign Exchange Gains
|
|
$
|
74
|
|
|
$
|
1,759
|
|
|
$
|
213
|
|
Net Unrealized Foreign Exchange Gains (Losses)
|
|
|
(1,571
|
)
|
|
|
(2,904
|
)
|
|
|
1,827
|
|
Use of
Estimates
The Company prepares its consolidated financial statements in
conformity with U.S. generally accepted accounting
principles. This requires management to make estimates and
assumptions during our reporting periods and at the date of our
financial statements. These estimates and assumptions affect the
Companys:
|
|
|
|
|
reported amounts of assets, liabilities and equity;
|
|
|
|
disclosure of contingent assets and liabilities; and
|
|
|
|
reported amounts of revenues and expenses.
|
Actual results could differ from those estimates and assumptions.
Accounting
Changes Implemented in Fiscal 2009
Fair
Value Measurements for Financial Assets and Financial
Liabilities
The Company adopted Statement of Financial Accounting Standards
No. 157, Defining Fair Value Measurement
(SFAS 157) for its financial assets and
financial liabilities on May 1, 2009. Issued by the FASB in
September 2006, SFAS 157:
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provides a common definition of fair value;
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establishes a framework for measuring fair value in generally
accepted accounting principles; and
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expands disclosures about fair value instruments.
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It applies when other accounting standards require or permit
fair-value measurements. However, it does not require any new
fair-value measurements. In February 2008, the FASB issued
FSP 157-2,
Partial Deferral of the Effective Date of Statement
157 (FSP
No. 157-2).
FSP 157-2
delays the effective date of SFAS 157, for all nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008 which will be the
beginning of the Companys fiscal 2010. The adoption of
SFAS 157 at May 1, 2008 for all financial assets and
liabilities did not have a material impact on the financial
statements of the Company. Refer to Note 14
Fair Value of Financial Instruments for additional
disclosure on the adoption of SFAS 157.
Accounting
for Certain Key Items
This section provides information about how the Company accounts
for certain key items related to:
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capital investments,
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financing our business and
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operations
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45
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Policies
related to Capital Investments
Goodwill
and Other Intangible Assets
In accordance with Statement of Financial Accounting Standard
142 (FAS 142), Goodwill and Other
Intangible Assets, the Company does not amortize goodwill
or intangible assets with indefinite lives. Goodwill and
intangible assets with indefinite lives are tested for
impairment at each year end, or more frequently, if a
significant event occurs. Intangible assets with a finite life
are tested for impairment when events or change in circumstances
indicate the carrying value may not be recoverable. To test
goodwill for impairment, the Company compared the fair value of
its reporting units, and, if necessary, the implied fair value
of goodwill, with the corresponding carrying values. If
necessary, the Company recorded an impairment charge for any
shortfall. The Company determined the fair value of its
reporting units using a discounted cash flow model and used
other measures of fair value, such as purchase prices offered by
potential buyers of businesses that might be sold, if they were
viewed as better indicators of fair value. The Companys
annual impairment testing date has typically been April 30.
The Company conducted this annual impairment test of goodwill as
of April 30 and concluded that goodwill was not impaired for the
two-year period ended April 30, 2008. An interim impairment
testing was conducted as of January 31, 2009 following a
determination that triggering events, including the current
economic environment which has resulted in a significant decline
in the results of the Companys operations and the
sustained period of decline in market capitalization, existed
which indicated that the Companys goodwill was impaired.
In connection with this analysis, the Company used a market
approach for fair value and concluded that there was an
impairment in the carrying value of its goodwill for both
reporting units and recorded a non-cash impairment charge of
$2.8 million in fiscal year 2009.
Intangible assets consist of acquired and internally developed
patents and trademarks. Trademarks have an indefinite life and
are not amortized. The Company capitalizes application fees,
license fees, legal and other costs of successfully defending a
patent from infringement. The remaining costs are expensed as
incurred. Patents are amortized on a straight-line basis over
the legal life of the underlying patents. The weighted average
amortization period for patents is 17 years.
Impairment
of Long-Lived Assets
In accordance with Statement of Financial Accounting Standard
No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
routinely considers whether indicators of impairment of its
property and equipment assets, particularly its manufacturing
equipment, are present. If such indicators are present, the
Company determines whether the sum of the estimated undiscounted
cash flows attributable to the asset group in question is less
than their carrying value. For purposes of impairment testing,
long-lived assets are grouped at the component level, which for
the Company is by regional locations, as this is the lowest
level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities.
If the sum of the undiscounted cash flows attributable to the
asset group is less than the carrying value of the asset group,
an impairment loss is recognized based on the excess of the
carrying value of the asset group over its respective fair
value. Fair value is determined by discounting estimated future
cash flows, appraisals or other methods deemed appropriate. If
the asset group determined to be impaired are to be held and
used, the Company recognizes an impairment charge to the extent
the present value of anticipated net cash flows attributable to
the asset group is less than the assets carrying value.
The fair value of the assets then becomes the assets new
carrying value, which is depreciated over the remaining
estimated useful life of the assets. In connection with the
triggering events discussed in the Companys Goodwill
and Other Intangible Assets section above, during each
reporting period in fiscal year 2009 the Company reviewed its
long-lived assets and determined that none of its long-lived
assets were impaired for its asset groups. The determination was
based on reviewing estimated undiscounted cash flows for the
Companys asset groups.
46
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The evaluation of the recoverability of long-lived assets
requires the Company to make significant estimates and
assumptions. The principal assumptions utilized in our estimated
undiscounted cash flows for long-lived assets include
(a) revenue growth rates ranging from -10% to 10% and
(b) operating profit ranging from -5% to 15%. For this
analysis, the negative revenue and operating profit growth rates
were considered in the near term for certain asset groups based
on current economic conditions. Revenue growth rate and
operating profit assumptions are consistent with those utilized
in our operating plan and long-term financial planning process.
Methodologies used for valuing our long lived assets have not
changed from prior periods.
A 10% change in the estimates and assumptions used to calculate
the estimated undiscounted cash flows, which is a reasonable
change in the Companys assumptions, would not result in a
shortfall of the sum of the estimated undiscounted cash flows
against carrying value for any of its asset groups. The Company
will continue to monitor circumstances and events in future
periods to determine whether additional asset impairment testing
is warranted.
Policies
related to Financing Our Business
Financial
Instruments
The carrying amount of cash and cash equivalents, receivables,
accounts payable, accrued expenses, and customer deposits
approximate fair value due to their relatively short maturities.
Debt and notes payable reflect a market rate of interest, as
such recorded amounts approximate fair value.
Derivative
Financial Instruments
The Company follows Statement of Financial Accounting Standards
No. 133 (FAS 133), Accounting for
Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts for hedging activities. All derivatives,
whether designated in hedging relationships or not, are required
to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized
in the statement of operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of
cash flow hedges are recognized in earnings.
The Company selectively utilizes forward exchange rate contracts
to hedge its exposure to adverse exchange rate fluctuations on
foreign currency denominated accounts receivable and accounts
payable (both trade and inter-company). These forward contracts
have not been designated as hedges under SFAS 133. At the
end of each month, the Company marks the outstanding forward
contracts to market and records an unrealized foreign exchange
gain or loss for the mark-to-market valuation. As of
April 30, 2009, the Company did not have any open forward
contracts. The effect of derivative instruments on the
Consolidated Statement of Operations is discussed further in
Note 14 Fair Value of Financial
Instruments.
Cash and
Cash Equivalents
The Company considers highly liquid short-term investments with
original maturities from the date of purchase of three months or
less, if any, to be cash equivalents. The Companys cash
consists of demand deposits in large financial institutions. At
times, balances may exceed federally insured limits. Cash
balances which are not available for general corporate purposes
are classified as restricted cash.
47
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Policies
related to Operations
Revenue
Recognition
The Company sells ultrahigh-pressure waterjet systems. Sales of
waterjet systems within the Standard segment are primarily
related to the Companys cutting and cleaning systems using
ultrahigh-pressure water pumps and do not require significant
custom configuration or modifications. Installation of these
waterjet systems by the Company is not essential to the
functionality of the waterjet systems but the Company does
provide installation as a separate service. Sales of waterjet
systems within the Advanced segment are generally complex
aerospace and automation systems, which require specific custom
configuration and advanced features to match unique customer
applications as well as parts and services to sustain these
installed systems. Installation by the Company is essential to
the functionality of waterjet systems sold within the Advanced
segment.
The Company recognizes revenue for sales of ultrahigh-pressure
waterjet pumps, consumables, and services, and billing for
freight charges, in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB 104),
Revenue Recognition in Financial Statements and EITF
Issue
No. 00-21
(EITF 00-21),
Revenue Arrangements with Multiple Deliverables..
Additionally, because
FlowMastertm
software, our PC-based waterjet control, is essential to the
functionality of the Companys waterjet systems, the
Company recognizes revenue on sales of waterjet systems in
accordance with Statement of Position
97-2
(SOP 97-2),
Software Revenue Recognition. Specifically, for our
waterjet systems that do not require significant modification or
customization, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title and risk of loss have
passed to the customer, the price is fixed or determinable, and
collectibility is reasonably assured.
Unearned revenue is recorded for products or services that have
not been provided but have been invoiced under contractual
agreements or paid for by a customer, or when products or
services have been provided but all the criteria for revenue
recognition have not been met.
We recognize revenue for delivered elements only when the
delivered elements have standalone value, fair values of
undelivered elements are known, uncertainties regarding customer
acceptance are resolved, and there are no customer-negotiated
refund or return rights affecting the revenue recognized for
delivered elements. For contract arrangements that combine
deliverables such as systems with embedded software, and
installation, each deliverable is generally considered a
separate unit of accounting or element. The consideration
received is allocated among the separate units of accounting
based on their respective fair values, and the applicable
revenue recognition criteria are applied to each of the separate
units. In cases where there is objective and reliable evidence
of the fair value of the undelivered item in an arrangement but
no such evidence for the delivered item, the residual method is
used to allocate the arrangement consideration.
In general, sales of our waterjet systems within our Standard
segment are FOB shipping point or FOB destination, depending on
geographical location, and the title passes to the customer
based on the specific terms in each contract.
For complex aerospace and application systems designed and
manufactured to buyers specification, the Company
recognizes revenue using the percentage of completion method in
accordance with Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Typical lead times can
range from two to 18 months. Sales and profits on such
contracts are recorded based on the ratio of total actual
incurred costs to date to the total estimated costs for each
contract (the cost-to-cost method). Losses on
contracts are recognized in the period in which they are
determined. The impact of revisions of contract estimates is
recognized as a cumulative change in estimate in the period in
which the revisions are made.
Shipping revenues and expenses are recorded in revenue and cost
of goods sold, respectively.
48
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost of
Sales
Cost of sales is generally recognized when products are shipped
or services are delivered. In the case of waterjet systems, cost
of sales for delivered systems is generally recognized in the
period when the revenue for all or portion of the waterjet
system sale is recognized. Cost of sales includes direct and
indirect costs associated with the manufacture, installation and
service of the Companys systems and consumable parts
sales. Direct costs include material and labor, while indirect
costs include, but are not limited to, depreciation, inbound
freight charges, purchasing and receiving costs, inspection
costs, warehousing costs, internal transfer costs and other
costs of our distribution network.
Advertising
Expense
The Company recognizes advertising expense as incurred including
online and offline costs to promote its brands. For the
respective years ended April 30, 2009, 2008 and 2007, the
advertising expense was $1.2 million, $1.2 million and
$1.0 million.
Inventories
Inventories are stated at the lower of cost or market. Costs
included in inventories consist of materials, labor and
manufacturing overhead, which are related to the purchase or
production of inventories. The Company uses the
first-in,
first-out method or moving average cost method to determine its
cost of inventories.
Income
Taxes
The Company accounts for income taxes under the asset and
liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included in the consolidated financial
statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it
believes these assets will more likely than not be realized. In
making such determination, the Company considers all available
positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax
planning strategies and recent financial operations. In the
event the Company was to determine that it would be able to
realize its deferred income tax assets in the future in excess
of its net recorded amount, the Company would make an adjustment
to the valuation allowance which would reduce the provision for
income taxes.
In July 2006, the FASB issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which clarifies the
accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS 109,
Accounting for Income Taxes. FIN 48 provides
that a tax benefit from an uncertain tax position may be
recognized when it is more likely than not that the position
will be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on its technical
merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized
upon the adoption of FIN 48 and in subsequent periods. This
interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 was effective for fiscal years beginning after
December 15, 2006.
The Company adopted the provisions of FIN 48 on May 1,
2007. As a result of the implementation of FIN 48, the
Company recognized approximately a $543,000 increase in the
liability for unrecognized tax benefits, which was accounted for
as an increase to the May 1, 2007 accumulated deficit
balance.
49
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recognizes interest and penalties related to
unrecognized tax benefits within the interest expense line in
the accompanying consolidated statement of operations. Accrued
interest and penalties are included within the Other Long-Term
Liability line in the consolidated balance sheet as the amounts
are not material for any of the balance sheet periods presented.
Concentration
of Credit Risk
In countries or industries where the Company is exposed to
significant credit risk, sufficient collateral, including cash
deposits
and/or
letters of credit, is required prior to the completion of a
transaction.
The Company makes use of foreign exchange contracts to cover
material transactions denominated in other than the functional
currency of the relevant business unit. Credit risks are
mitigated by the diversity of customers in our customer base
across many different geographic regions and performing
creditworthiness analyses on such customers. No single customer
accounted for 10% or more of revenues during any of the
respective years ended April 30, 2009, 2008 and 2007.
As of April 30, 2009 and 2008, the Company does not believe
that it has any significant concentrations of credit risk.
Warranty
Liability
Products are warranted to be free from material defects for a
period of at least one year from the date of installation.
Warranty obligations are limited to the repair or replacement of
products. Warranty liability is recorded at time of the sale.
The Companys warranty accrual is reviewed quarterly by
management for adequacy based upon recent shipments and
historical warranty experience. Credit is issued upon receipt of
the returned goods, or, if material, at the time of notification
and approval.
Product
Liability
The Company is obligated under terms of its product liability
insurance contracts to pay all costs up to deductible amounts.
These costs are reported in General and Administrative expenses
and include insurance, investigation and legal defense costs
when such amounts are reasonably estimable. Please refer to
Note 15 Commitments and Contingencies
for a description of any material product liability claims
and litigation.
Health
Benefits
The Company is self insured for a portion of the cost of
employee group health insurance, medical, dental, and vision,
each in the United States. The Company maintains excess loss
insurance that covers health care costs in excess of $100,000
per person per year.
Each reporting period, the Company records the costs of its
health insurance plan including paid claims, the change in the
estimate of incurred but not reported (IBNR) claims,
taxes, and administrative fees (collectively the Plan
Cost). The Company regularly reviews its estimates of
reported and unreported claims and provides for these losses
through insurance reserves. These reserves are influenced by
rising costs of health care and other costs, increases in
claims, time lag in claim information, and levels of excess loss
insurance coverage carried. As claims develop and additional
information becomes available to us, adjustments to the related
loss reserves may occur.
For the respective years ended April 30, 2009, 2008 and
2007, the Companys annual Plan Cost was approximately
$2.9 million, $2.9 million, and $2.4 million, and
the liability, including IBNR, recorded in Accrued Payroll and
Related Liabilities, was $314,000 and $252,000 as of
April 30, 2009 and 2008, respectively.
50
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research
and Engineering
The majority of research and engineering expenses are related to
research and development efforts undertaken by the Company which
are expensed as incurred. Research and development expenses were
$8.6 million, $8.3 million and $8.7 million for
fiscal year 2009, 2008 and 2007.
Stock
Based Compensation
The Company accounts for share-based compensation according to
Statement of Financial Accounting Standards No. 123R
(SFAS 123R), Share-Based Payment (Revised
2004). This statement requires the Company to measure the
fair value of share-based awards on the dates they are granted
or modified. The Company estimates the grant-date fair value of
awards using the Black-Scholes option valuation model,
recognizing the stock-based compensation expense on a
straight-line basis over the requisite service period, and
adjusted for forfeitures expected to occur over the vesting
period of the award. See Note 17 Stock-Based
Compensation for further information related to the
Companys stock compensation plans.
Related
Parties
For the purposes of these financial statements, parties are
considered to be related to the Company if the Company has the
ability, directly or indirectly, to control the party or
exercise significant influence over the party in making
financial and operating decisions, or vice versa, or where the
Company and the party are subject to common control or common
significant influence. Related parties may be individuals or
other entities.
A director of the Company was a founder and is a senior member
of management in a company which provides insurance brokerage
services to the Company. The Company believes that its
transactions with this related entity are negotiated at a price
that approximates fair value.
Premium payments for insurance coverage that this related entity
passes on to the underwriters have totaled $1.8 million,
$1.9 million and $2.1 million for the respective years
ended April 2009, 2008 and 2007. These amounts included
commissions of $346,000, $137,000 and $218,000, in each of the
respective fiscal years.
As of April 30, 2009, the Company owed $17,000 to the
related entity which is included in Other Accrued Liabilities
balance on the Consolidated Financial Statements.
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Note 2
|
Recently
Issued Accounting Pronouncements
|
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised 2007), Business
Combinations (SFAS 141R) and Statement of
Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51
(SFAS 160). These new standards are the
U.S. GAAP outcome of a joint project with the International
Accounting Standards Board. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. SFAS 141R
requires that the fair value of the purchase price of an
acquisition including the issuance of equity securities be
determined on the acquisition date; requires that all assets,
liabilities, contingent consideration, contingencies, and
in-process research and development costs of an acquired
business be recorded at fair value at the acquisition date;
requires that acquisition costs generally be expensed as
incurred; requires that restructuring costs generally be
expensed in periods subsequent to the acquisition date; and
requires that changes in deferred tax asset valuation allowances
and acquired income tax uncertainties after the measurement
period impact income tax expense. SFAS 160 establishes
reporting requirements that clearly identify and
51
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
distinguish between the interests of the parent and the
interests of the non-controlling owners. Under SFAS 141R,
the Company expensed $3.8 million of previously deferred
direct transaction costs which had been capitalized as part of
the contemplated acquisition cost of OMAX Corporation
(OMAX) under SFAS 141 in the fourth quarter of
its fiscal year 2009 as it was deemed probable that the
contemplated merger with OMAX would not close prior to the
adoption of SFAS 141R on May 1, 2009. This amount is
included in the Restructuring and Other line item on the
Consolidated Statement of Operations for the year ended
April 30, 2009. The Company does not expect the adoption of
these statements to have a material effect on its financial
position, results of operation or cash flows.
In February 2008, the FASB issued
FSP 157-2,
Partial Deferral of the Effective Date of Statement
157 (FSP
No. 157-2).
FSP 157-2
delays the effective date of SFAS 157, for all nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008. The Company
therefore adopted SFAS 157 solely as it applies to its
financial assets and liabilities. This adoption at May 1,
2008 did not have a material impact on the financial statements
of the Company. See Note 14 Fair Value of
Financial Instruments for additional disclosure on the
adoption of SFAS 157. Nonfinancial assets and nonfinancial
liabilities for which we have not applied the provisions of
FAS 157 include those measured at fair value like goodwill
and indefinite lived intangible asset impairment testing, and
asset retirement obligations initially measured at fair value.
The Company is currently evaluating the impact of adopting
SFAS 157 for its nonfinancial assets and nonfinancial
liabilities and does not believe it will have a material effect
on the Consolidated Financial Statements at the beginning of its
fiscal year 2010.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 was effective for the
Company in the first quarter of its fiscal year 2009.
SFAS 159 provides entities the option to choose to measure
eligible items at fair value at specified election dates. If
elected, an entity must report unrealized gains and losses on
the item in earnings at each subsequent reporting date. The fair
value option may be applied instrument by instrument, and with a
few exceptions, such as investments otherwise accounted for by
the equity method, is irrevocable (unless a new election date
occurs); and is applied only to entire instruments and not to
portions of instruments. The Company did not elect to apply the
fair value option to any of its financial instruments.
In April 2009, the FASB issued FASB Staff Position
No. FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP 107-1),
which amends FASB Statement No. 107, Disclosures about Fair
Values of Financial Instruments, to require disclosures about
fair value of financial instruments in interim financial
statements as well as in annual financial statements.
FSP 107-1
also amends Accounting Principles Board Opinion No. 28,
Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods.
FSP 107-1
is effective for interim periods ending after June 15,
2009, with early adoption permitted for periods ending after
March 15, 2009. The Company will adopt
FSP 107-1
in the first quarter of fiscal year 2010 and does not expect
that the adoption of
FSP 107-1
will have a material impact on the Companys consolidated
financial statements and disclosures.
In May 2009, the FASB issued Statement of Financial Accounting
Standards No. 165, Subsequent Events
(SFAS 165). The standard does not require
significant changes regarding recognition or disclosure of
subsequent events, but does require disclosure of the date
through which subsequent events have been evaluated for
disclosure and recognition. The standard is effective for
financial statements issued after June 15, 2009. The
implementation of this standard will not have a significant
impact on the consolidated financial statements of the Company.
52
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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Note 3
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Business
Segments
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Effective May 1, 2008, the Company modified its internal
reporting process and the manner in which the business is
managed and in turn, reassessed its segment reporting. As a
result of this process, the Company is now reporting its
operating results to the chief operating decision maker based on
market segments which has resulted in a change to the operating
and reportable segments. Previously, the Company managed its
business based on geography. The Companys change in
operating and reportable segments from a geographic basis to
market segments is consistent with managements long-term
growth strategy. The Companys new reportable segments are
Standard and Advanced. The Standard segment includes sales and
expenses related to the Companys cutting and cleaning
systems using ultrahigh-pressure water pumps as well as parts
and services to sustain these installed systems. Systems
included in this segment do not require significant custom
configuration. The Advanced segment includes sales and expenses
related to the Companys complex aerospace and application
systems which require specific custom configuration and advanced
features to match unique customer applications as well as parts
and services to sustain these installed systems.
In April 2008, the Company decided to sell its CIS Technical
Solutions division (CIS division), which would have
been reported as part of its Advanced Segment. The Company
ceased its efforts to sell the CIS division and closed its
operations in January 2009.
Accordingly, the Company has recast all periods presented to
reflect this divisions results as discontinued operations.
Refer to Note 4 Discontinued Operations,
Mergers and Investments for further discussion on the
results of CIS division for the respective years ended
April 30, 2009, 2008 and 2007.
Segment operating results are measured based on revenue growth,
gross margin and operating income (loss).
53
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below presents information about the reported
operating income (loss) and assets of the Company for the years
ended April 30, 2009, 2008 and 2007.
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Inter-Segment
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Standard
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Advanced
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All Other(i)
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Eliminations
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Total
|
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Fiscal Year 2009
|
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External sales
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$
|
181,132
|
|
|
$
|
28,971
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|
|
$
|
|
|
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$
|
|
|
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$
|
210,103
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|
|
|
|
|
|
|
|
Inter-segment sales(ii)
|
|
|
2,549
|
|
|
|
|
|
|
|
|
|
|
|
(2,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
79,743
|
|
|
|
8,459
|
|
|
|
|
|
|
|
126
|
|
|
|
88,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,638
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
4,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
21,067
|
|
|
|
(272
|
)
|
|
|
(50,556
|
)
|
|
|
126
|
(iii)
|
|
|
(29,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
143,872
|
|
|
|
23,495
|
|
|
|
8,698
|
|
|
|
(31,105
|
)(iv)
|
|
|
144,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales
|
|
$
|
216,063
|
|
|
$
|
28,196
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
244,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment sales(ii)
|
|
|
3,836
|
|
|
|
|
|
|
|
|
|
|
|
(3,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
97,868
|
|
|
|
4,944
|
|
|
|
|
|
|
|
(1,102
|
)
|
|
|
101,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,116
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
3,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
40,967
|
|
|
|
(5,090
|
)
|
|
|
(17,966
|
)
|
|
|
(1,102
|
)(iii)
|
|
|
16,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
301
|
|
|
|
2,463
|
|
|
|
|
|
|
|
|
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
152,267
|
|
|
|
27,829
|
|
|
|
8,587
|
|
|
|
(37,528
|
)(iv)
|
|
|
151,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales
|
|
$
|
179,339
|
|
|
$
|
34,096
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
213,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment sales(ii)
|
|
|
2,446
|
|
|
|
|
|
|
|
|
|
|
|
(2,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
81,940
|
|
|
|
8,969
|
|
|
|
|
|
|
|
(136
|
)
|
|
|
90,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,378
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
2,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
27,306
|
|
|
|
(1,485
|
)
|
|
|
(21,028
|
)
|
|
|
(136
|
)(iii)
|
|
|
4,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
301
|
|
|
|
2,463
|
|
|
|
|
|
|
|
|
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
119,676
|
|
|
|
31,678
|
|
|
|
12,328
|
|
|
|
(40,510
|
)(iv)
|
|
|
123,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Includes corporate overhead expenses as well as general and
administrative expenses of inactive subsidiaries that do not
constitute segments. Fiscal year 2009 operating loss includes
charges related to the patent litigation with OMAX pursuant to a
Settlement and Cross Licensing Agreement which is discussed in
Note 15 Commitments and Contingencies
and the write-off of previously deferred direct transaction
costs which had been capitalized as part of the contemplated
acquisition cost of OMAX under SFAS 141. |
|
(ii) |
|
Inter-segment sales represent products between the
Companys geographic areas, including between operations
within the United States and between the Companys U.S.
operations and foreign subsidiaries, based on the Companys
transfer pricing policy. These amounts have been eliminated in
consolidation. |
|
(iii) |
|
Any incremental gross profit resulting from the sale of
inventory between the Companys geographic areas, including
between operations within the United States and between the
Companys U.S. operations and foreign subsidiaries has been
eliminated in consolidation. |
|
(iv) |
|
Cumulative profit or loss in inventory and investment in
subsidiaries have been eliminated in consolidation. |
54
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4
|
Discontinued
Operations, Mergers and Investments
|
Discontinued
Operations
In April 2008, the Company decided to sell its CIS division,
which would have been reported as part of its Advanced Segment.
The Company ceased its efforts to sell the CIS division and
closed its operations in January 2009. The Company recognized
$789,000 in total closure costs for the division during the
year, which is comprised of $520,000 in employee termination
benefits and $323,000 of facility closure costs, net of $54,000
proceeds from the sale of divisional assets. The majority of the
severance costs for the CIS division were paid out as of
April 30, 2009.
The Company has classified the financial results of its CIS
division as discontinued operations in the Consolidated
Statements of Operations for all periods presented. The
Consolidated Balance Sheets as of April 30, 2009 and
April 30, 2008 and the Consolidated Statements of Cash
Flows for the respective years ended April 30, 2009, 2008
and 2007 do not reflect discontinued operations treatment for
the CIS division as the related amounts are not material.
Summarized financial information for this discontinued operation
for the respective years ended April 30, 2009, 2008 and
2007 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
$
|
1,605
|
|
|
$
|
4,107
|
|
|
$
|
3,664
|
|
Income (Loss) before provision for income taxes
|
|
|
(733
|
)
|
|
|
673
|
|
|
|
654
|
|
(Provision) benefit for income taxes
|
|
|
|
|
|
|
(230
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations of discontinued operations
|
|
$
|
(733
|
)
|
|
|
443
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contemplated
Merger with OMAX
On December 4, 2007, the Company entered into an Option
Agreement (the Option Agreement) with OMAX. OMAX is
a provider of precision-engineered, computer-controlled,
two-axis abrasivejet systems for use in the general machine shop
environment. The contemplated transaction with OMAX was subject
to due diligence, the negotiation of a mutually acceptable
definitive agreement and other customary closing conditions,
including approval of the merger under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976. The purchase price pursuant
to the Option Agreement was at $108.75 million payable in
cash and stock as well as an earn-out provision of up to
$26 million on the two-year anniversary of the closing of
the merger.
In September 2008, the Company successfully negotiated the terms
of a Merger Agreement with OMAX, amended in November 2008, which
effectively reduced the purchase price to $75 million
payable in a combination of cash, stock and a note payable. The
Merger Agreement, as amended, also provided for an earn-out
provision of up to $52 million on the third anniversary of
the closing of the merger.
In March 2009, the Company simultaneously entered into the
following two agreements with OMAX:
(1) A Settlement and Cross License Agreement (the
Agreement) where both parties agreed to dismiss the
litigation pending between them and release all claims made up
to the date of the execution of the Agreement. The Company
agreed to pay $29 million to OMAX in relation to this
agreement which was funded as follows:
|
|
|
|
|
A non-refundable cash payment of $8 million to OMAX in
March 2009 as part of the execution of the Agreement;
|
55
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
A cash payment of $6 million in March 2009 paid directly to
an existing escrow account with OMAX, increasing the escrow
amount from $9 million to a total of $15 million as
part of the execution of the Agreement; and
|
|
|
|
In the event the merger would be consummated by August 15,
2009, the entire amount would be applied towards the
$75 million purchase price. However, in the event the
merger would not be consummated by August 15, 2009, the
$15 million held in escrow would be released to OMAX on
August 16, 2009 and the Company would issue a promissory
note in the principle amount of $6 million to OMAX for the
remaining balance on the $29 million settlement amount.
|
(2) An amendment to the existing Merger Agreement which
provided for the following:
|
|
|
|
|
A non-refundable cash payment of $2 million to OMAX for the
extension of the closing of the merger from March 31, 2009
to August 15, 2009 with closing at the option
of the Company; and
|
|
|
|
In the event the merger would be consummated by August 15,
2009, the $2 million would be applied towards the
$75 million purchase price. However, in the event the
merger would not be consummated by August 15, 2009 the
$2 million would be forfeited and the Company would issue a
promissory note of $4 million to OMAX.
|
In May 2009, the Company made the decision to terminate its
option to acquire OMAX following a thorough investigation of
financing alternatives to complete the merger and unsuccessful
attempts to negotiate a lower purchase price with OMAX. Pursuant
to the terms of the amended Merger Agreement and the Settlement
and Cross Licensing Agreement dated March 2009, the Company will
be required to issue the two promissory notes to OMAX with
principal amounts of $6 million and $4 million on
August 16, 2009 as discussed above. Both promissory notes
will bear interest at a compounded annual rate of 2% with
accumulated interest and principal being payable and due in
August 2013. As the stated interest rate of 2% is below its
incremental borrowing rate, the Company will discount these
promissory notes upon issuance and record the subsequent
amortization of the discount on the promissory notes to interest
expense. The Company anticipates recording a charge of
approximately $2.4 million in relation to the termination
of the Merger Agreement with OMAX, net of the discounts related
to the two promissory notes, in the first quarter of its fiscal
year 2010.
As of April 30, 2009, the Company had accumulated a total
of $17.1 million in deferred acquisition costs which
consists of the $15 million, and accrued interest of
$0.1 million, held in escrow as detailed above, and the
non-refundable amount of $2 million which was paid directly
to OMAX in March 2009.
Dardi
Investment:
On January 5, 2009, the Company entered into an equity
purchase agreement in which it acquired a minority interest in
Dardi International (Dardi), a waterjet manufacturer
based in China, for $2 million cash. Additionally, the
Company incurred $1.7 million in direct costs attributed to
the acquisition. The Company accounted for the $3.7 million
investment in Dardi using the cost method. This investment has
been classified as an Other Long-Term Asset on the Consolidated
Balance Sheet.
|
|
Note 5
|
Basic and
Diluted Income (Loss) per Share
|
Basic income (loss) per share represents net income (loss)
available to common shareholders divided by the weighted average
number of shares outstanding during the period. Diluted income
(loss) per share represents net income (loss) available to
common shareholders divided by the weighted average number of
shares outstanding including the potentially dilutive impact of
common stock equivalents, which include stock options and
warrants. Potential common stock equivalents of stock options
and warrants are computed by the
56
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
treasury stock method and are included in the denominator for
computation of earnings per share if such equivalents are
dilutive.
The following table sets forth the computation of basic and
diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
$
|
(23,086
|
)
|
|
$
|
21,911
|
|
|
$
|
4,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income (loss) per share
weighted average shares
|
|
|
37,627
|
|
|
|
37,421
|
|
|
|
37,192
|
|
Dilutive potential common shares from employee stock options
|
|
|
|
|
|
|
147
|
|
|
|
333
|
|
Dilutive potential common shares from warrants
|
|
|
|
|
|
|
|
|
|
|
270
|
|
Dilutive potential common shares from stock compensation plans
|
|
|
|
|
|
|
325
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) per share
weighted average shares and assumed conversions
|
|
|
37,627
|
|
|
|
37,893
|
|
|
|
37,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share from continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
0.59
|
|
|
$
|
0.11
|
|
Diluted income (loss) per share from continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
0.58
|
|
|
$
|
0.11
|
|
There were 1,201,365, 617,760, and 21,250 potentially dilutive
common shares from employee stock options and stock units which
have been excluded from the diluted weighted average share
denominator for the respective years ended April 30, 2009,
2008 and 2007 as their effect would be anti-dilutive.
Receivables, net as of April 30, 2009 and 2008 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Trade Accounts Receivable
|
|
$
|
25,304
|
|
|
$
|
32,410
|
|
Unbilled Revenues
|
|
|
9,033
|
|
|
|
4,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,337
|
|
|
|
36,999
|
|
Less Allowance for Doubtful Accounts
|
|
|
(2,234
|
)
|
|
|
(3,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,103
|
|
|
$
|
33,632
|
|
|
|
|
|
|
|
|
|
|
Unbilled revenues do not contain any amounts which are expected
to be collected after one year.
The allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses on existing
receivables. The Company determines the allowance based on
historical write-off experience and current economic data. The
allowance for doubtful accounts is reviewed quarterly. Past due
balances over 90 days and over a specified amount are
reviewed individually for collectability. All other balances are
reviewed on a pooled basis by type of receivable. Account
balances are charged against the allowance when the Company
determines that it is probable the receivable will not be
recovered.
57
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories are stated at the lower of cost (determined by using
the first-in
first-out or average cost method) or market. Costs included in
inventories consist of materials, labor, and manufacturing
overhead, which are related to the purchase or production of
inventories. Write-downs, when required, are made to reduce
excess inventories to their estimated net realizable values.
Such estimates are based on assumptions regarding future demand
and market conditions. If actual conditions become less
favorable than the assumptions used, an additional inventory
write-down may be required. Inventories as of April 30,
2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw Materials and Parts
|
|
$
|
11,806
|
|
|
$
|
19,671
|
|
Work in Process
|
|
|
1,762
|
|
|
|
3,215
|
|
Finished Goods
|
|
|
7,912
|
|
|
|
6,453
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,480
|
|
|
$
|
29,339
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8
|
Property
and Equipment
|
Property and equipment are stated at cost. Additions, leasehold
improvements and major replacements are capitalized. When assets
are sold, retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the statement of
operations within operating income (loss). Depreciation for
financial reporting purposes is provided using the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the related lease
term, or the life of the asset. Expenditures for maintenance and
repairs are charged to expense as incurred.
The carrying value of the Companys Property and Equipment
and estimated service lives as of April 30, 2009 and 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
Range of Lives
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
N/A
|
|
$
|
468
|
|
|
$
|
468
|
|
Buildings and Leasehold Improvements
|
|
19-30
|
|
|
10,266
|
|
|
|
14,538
|
|
Machinery and Equipment
|
|
3-11
|
|
|
24,014
|
|
|
|
27,192
|
|
Furniture and Fixtures
|
|
3-9
|
|
|
2,667
|
|
|
|
4,015
|
|
Construction in Progress
|
|
|
|
|
6,710
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,125
|
|
|
|
48,322
|
|
Less Accumulated Depreciation and Amortization
|
|
|
|
|
(21,142
|
)
|
|
|
(29,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
|
$
|
22,983
|
|
|
$
|
18,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the respective years ended
April 30, 2009, 2008 and 2007 was $3.9 million,
$3.6 million, and $2.7 million. Assets held under
capitalized leases and included in property and equipment were
$1.9 million and $501,000 as of April 30, 2009 and
2008. Accumulated depreciation on these assets was $255,000 and
$111,000 as of April 30, 2009 and 2008, respectively.
|
|
Note 9
|
Intangible
Assets
|
The Company capitalizes application fees, license fees, legal
and other costs of successfully defending a patent from
infringement. The remaining costs are expensed as incurred.
58
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The component of the Companys finite lived intangible
assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Patents
|
|
$
|
5,849
|
|
|
$
|
5,202
|
|
Less Accumulated Amortization
|
|
|
(2,146
|
)
|
|
|
(1,816
|
)
|
|
|
|
|
|
|
|
|
|
Patents, net
|
|
$
|
3,703
|
|
|
$
|
3,386
|
|
|
|
|
|
|
|
|
|
|
Patents are amortized on a straight-line basis over the legal
life of the underlying patents. The weighted average
amortization period for patents is 17 years.
Intangible assets with indefinite lives consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Trademarks
|
|
$
|
753
|
|
|
$
|
676
|
|
Amortization expense for intangible assets with definite lives
for continuing operations for the respective years ended
April 30, 2009, 2008 and 2007 amounted to $365,000,
$282,000 and $283,000. The estimated annual amortization expense
is $370,000 for continuing operations for each year through
April 30, 2014.
SFAS 142 requires that goodwill be tested for impairment
between annual tests if an event occurs or circumstances change
that would more likely than not reduce their fair value below
their carrying amount. The Companys market capitalization
has been significantly impacted by the extreme volatility in the
U.S. equity and credit markets and was trading below the
book value of shareholders equity for majority of the last
six months of fiscal year 2009. As a result, the Company
evaluated whether the decrease in the market capitalization
reflected factors that would more likely than not reduce the
fair value of its reporting units below their carrying value.
Based on a combination of factors, including the current
economic environment which resulted in a significant decline in
the results of the Companys operations and the sustained
period of decline in market capitalization, the Company
concluded that there were sufficient indicators to perform an
interim impairment test.
The first step of the impairment test utilized the income
approach, which estimated the fair value based on future
discounted cash flows. The key assumptions used to determine the
fair value of the Companys reporting units during this
impairment test were: (a) expected cash flow for a period
of 5 years; (b) terminal value based upon terminal
growth rates of between 3% and 5%; and (c) a discount rate
of 15% which was based on our best estimate of the weighted
average cost of capital adjusted for risks associated with the
reporting units. Based on the first step of this analysis, the
Company determined that the fair value of both its reporting
units, were in excess of their carrying value.
Although the first step of the two step testing process for the
impairment of the Company goodwill using the income approach
indicated that the fair value of goodwill exceeded its recorded
carrying value as of January 31, 2009, as noted above, as a
result of recent substantial volatility in the capital markets
the Companys stock price and market value had decreased
significantly as of January 31, 2009. The Company therefore
determined that it was appropriate to use a market approach to
perform a comparison of the carrying value of its reporting
units to its market capitalization, after appropriate
adjustments for control premium and other considerations. Using
this approach, the Companys market capitalization was
determined to be significantly less than the net book value
(i.e., stockholders equity as reflected in the
Companys financial statements) of each reporting unit.
Based on this condition, the Company performed the second step
of the two step testing which consisted of a hypothetical
valuation of all the tangible and intangible assets of the
59
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reporting units. Based on this second step analysis, the Company
concluded that the goodwill in each of its reporting units was
impaired and recorded a non-cash expense, of $2.8 million
in fiscal year 2009.
|
|
Note 11
|
Accrued
Liabilities
|
The Companys accrued liabilities consist of warranty
obligations, restructuring liabilities, professional fee
accruals, provisions for litigation, and other items.
Warranty
Obligations
The Companys estimated obligations for warranty are
accrued concurrently with the revenue recognized. The Company
makes provisions for its warranty obligations based upon
historical costs incurred for such obligations adjusted, as
necessary, for current conditions and factors. Due to the
significant uncertainties and judgments involved in estimating
the Companys warranty obligations, including changing
product designs and specifications, the ultimate amount incurred
for warranty costs could change in the near term from the
current estimate. The Company believes that the warranty accrual
as of April 30, 2009 is sufficient to cover expected
warranty costs.
The following table shows the fiscal year 2009 and 2008 activity
for the Companys warranty accrual:
|
|
|
|
|
Accrued warranty balance as of May 1, 2007
|
|
$
|
2,405
|
|
Accruals for warranties of fiscal year 2008 sales
|
|
|
3,589
|
|
Warranty costs incurred in fiscal year 2008
|
|
|
(2,893
|
)
|
|
|
|
|
|
Accrued warranty balance as of April 30, 2008
|
|
|
3,101
|
|
Accruals for warranties of fiscal year 2009 sales
|
|
|
3,415
|
|
Warranty costs incurred in fiscal year 2009
|
|
|
(4,093
|
)
|
|
|
|
|
|
Accrued warranty balance as of April 30, 2009
|
|
$
|
2,423
|
|
|
|
|
|
|
Restructuring
Charges
In June 2008, the Company committed to a plan to establish a
single facility for designing and building its advanced waterjet
systems at its Jeffersonville, Indiana facility and to close its
manufacturing facility in Burlington, Ontario, Canada. Charges
to complete this plan included employee severance and
termination benefits, lease termination costs, and inventory
write-downs. The Company does not anticipate significant costs
to be recorded in relation to this facility closure during
fiscal year 2010.
In October 2008, as part of the Companys continuous review
of strategic alternatives globally, management resolved to close
its office and operations in Korea and sell through a
distributor instead. Charges associated with this closure
included employee severance and termination benefits. The
Company does not anticipate significant costs to be recorded in
relation to this closure during fiscal year 2010.
In the fourth quarter of fiscal year 2009, the Company committed
to a plan to relocate certain of its manufacturing activities
from Taiwan to the United States. This plan was culminated by a
decision to cease all of its remaining manufacturing activities
at this location effective in the first quarter of fiscal year.
Charges associated with the fourth quarter actions included
employee severance and termination benefits of $375,000 which
had been fully paid off by April 30, 2009, and inventory
impairment charges of $36,000. The Company estimates that the
additional costs associated with the culmination of the plan to
cease all manufacturing in June 2009 will range from
$0.3 million to $0.4 million in the first quarter of
fiscal 2010.
60
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys restructuring
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Severance and termination benefits
|
|
$
|
2,339
|
|
|
$
|
|
|
|
$
|
|
|
Lease termination costs and long-lived assets impairment charge
|
|
|
187
|
|
|
|
|
|
|
|
|
|
Inventory write-down
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,670
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes restructuring activity by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
|
|
Advanced
|
|
|
Total
|
|
|
Balance, May 1, 2007
|
|
$
|
167
|
|
|
$
|
320
|
|
|
$
|
487
|
|
Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments
|
|
|
(59
|
)
|
|
|
(320
|
)
|
|
|
(379
|
)
|
Other
|
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring Charges
|
|
|
655
|
|
|
|
2,015
|
|
|
|
2,670
|
|
Cash Payments
|
|
|
(560
|
)
|
|
|
(1,784
|
)
|
|
|
(2,344
|
)
|
Other
|
|
|
(36
|
)
|
|
|
(108
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30 2009
|
|
$
|
59
|
|
|
$
|
123
|
|
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended April 30, 2009, the Company responded
to the downturn in the near term demand for our products by
reducing its global salaried staffing levels. The Company
incurred charges of approximately $0.6 million during the
current year in conjunction with this staff reduction. These
charges are not part of a formally adopted restructuring plan
and have been recorded in Restructuring and Other
Charges in the Companys Condensed Consolidated
Statement of Operations.
|
|
Note 12
|
Pension
and Other Post Retirement Benefits
|
The Company has a 401(k) savings plan in which employees may
contribute a percentage of their compensation. At its
discretion, the Company may make contributions based on employee
contributions and length of employee service. Company
contributions and expenses under the plan for the respective
years ended April 30, 2009, 2008 and 2007 were $776,000,
$944,000 and $806,000.
The Company sponsors a defined benefit pension plan in Taiwan,
which is governed by a local regulation: The Labor Standard Law
(1986). As required by the Labor Standard Law, the Company must
remit 4% of the employees base salary into a designated
investment account for the Pension Plan monthly. The pension
benefit an employee is entitled to equals two months
salary with a maximum of 45 months salary. An
employee is eligible to withdraw their pension benefit upon
25 years of service, age 55 with 15 years of
service, or age 60, if the employee is still employed by
the Company upon retirement. If an employee terminates prior to
retirement, the employee forfeits all accrued benefits under the
Plan. Due to a change in Taiwanese law, all new employees hired
after July 2005, are not subject to this plan, thus, the plan is
frozen. The Company uses an April 30 measurement date for its
plan.
All plan assets are deposited in an interest earning account.
The amount of net periodic cost recognized in fiscal year 2009
and 2008 was $46,000 and $71,000, respectively. The accumulated
benefit obligation, unrecognized net transition obligation, and
unrecognized loss as of April 30, 2009 were
$1.1 million, $16,000
61
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and $91,000, respectively. The Companys projected benefit
payments under this plan over the next year are $500,000.
Effective April 2007, the Company adopted Statement of Financial
Accounting Standards No. 158 (FAS 158)
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FAS Statements
No. 87, 88, 106, and 132(R). FAS 158 requires an
employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in
its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur
through comprehensive income of a business entity. This
statement also requires an employer to measure the funded status
of a plan as of the date of its year-end statement of financial
position. A cumulative effect adjustment of $201,000 was
recorded as an adjustment to accumulated other comprehensive
income upon adoption of FAS 158.
The following table provides a reconciliation of the changes in
the plans benefit obligations and fair value of plan
assets for the two-year period ended April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Changes in the Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation beginning balance
|
|
$
|
1,815
|
|
|
$
|
1,456
|
|
Service Cost
|
|
|
37
|
|
|
|
34
|
|
Interest Cost
|
|
|
60
|
|
|
|
56
|
|
Actuarial (Gain)/Loss
|
|
|
(249
|
)
|
|
|
118
|
|
Benefits Paid
|
|
|
|
|
|
|
|
|
Foreign Exchange Adjustment
|
|
|
(171
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation ending balance
|
|
$
|
1,492
|
|
|
$
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Changes in the Value of Plan Assets
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets beginning balance
|
|
$
|
1,237
|
|
|
$
|
1,044
|
|
Actual Return on Plan Assets
|
|
|
27
|
|
|
|
38
|
|
Employer Contribution
|
|
|
47
|
|
|
|
51
|
|
Benefits Paid
|
|
|
|
|
|
|
|
|
Foreign Exchange Adjustment
|
|
|
(123
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets ending balance
|
|
$
|
1,188
|
|
|
$
|
1,237
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions used to determine benefit obligations were
as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Discount rate
|
|
|
2.25
|
%
|
|
|
3.50
|
%
|
Expected rate of return on assets
|
|
|
1.50
|
%
|
|
|
2.75
|
%
|
Salary increase rate
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
62
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13
|
Long-Term
Obligations and Notes Payable
|
The Companys long-term obligations consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-term loan
|
|
$
|
1,879
|
|
|
$
|
2,914
|
|
Other financing arrangements
|
|
|
1,425
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,304
|
|
|
|
3,310
|
|
Less current maturities
|
|
|
(1,367
|
)
|
|
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
1,937
|
|
|
$
|
2,333
|
|
|
|
|
|
|
|
|
|
|
The long-term loan is a collateralized long-term variable rate
loan that bears interest at the current annual rate of 3.67% at
April 30, 2009 and matures in 2011. During the twelve
months ended April 30, 2009, the Company paid off $802,000
of the loan balance. As of April 30, 2009, $752,000 of the
loan balance was current. Scheduled principal payments on
long-term obligations excluding capital lease payments are as
follows:
|
|
|
|
|
Year Ending April 30,
|
|
|
|
|
2010
|
|
$
|
1,087
|
|
2011
|
|
|
1,087
|
|
2012
|
|
|
459
|
|
2013
|
|
|
|
|
2014
|
|
|
|
|
2015 and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,633
|
|
|
|
|
|
|
The Company leases certain office equipment under agreements
that are classified as capital leases, of which $375,000 is
recorded in the Current Portion of Long-Term Obligations in the
Consolidated Balance Sheet as of April 30, 2009. Scheduled
payments on these capital leases for the years ended after
April 30, 2009 are as follows:
|
|
|
|
|
Year Ending April 30,
|
|
|
|
|
2010
|
|
$
|
414
|
|
2011
|
|
|
384
|
|
2012
|
|
|
133
|
|
2013
|
|
|
|
|
2014
|
|
|
|
|
2015 and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
931
|
|
|
|
|
|
|
Notes payable balances consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2009
|
|
|
April 30, 2008
|
|
|
Senior Credit Facility
|
|
$
|
13,000
|
|
|
$
|
|
|
Revolving credit facilities in Taiwan
|
|
|
2,226
|
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,226
|
|
|
$
|
1,118
|
|
|
|
|
|
|
|
|
|
|
63
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Senior
Credit Facility
As of April 30, 2009, the Company had a Senior Credit
Facility with a borrowing capacity of $40 million. This
credit facility had a maturity date of June 9, 2013 and the
balance outstanding under the facility amounted to
$13 million which is reflected under Notes payable in the
Consolidated Financial Statements.
The Company subsequently amended its Credit Facility Agreement
on June 10, 2009 which amends the maturity date of the line
as well as certain covenants that the Company is required to
maintain. Under the amended covenants, the Company must maintain
a minimum Consolidated Adjusted EBITDA of $8 million
through the second quarter of fiscal 2011 and $10 million
thereafter, based on the most recent four fiscal quarters.
Consolidated Adjusted EBITDA is calculated as the amount equal
to Consolidated Net Income for such period plus interest, income
taxes, depreciation and amortization and other non-cash and
other certain allowable adjustments as specifically defined in
the credit agreement; including the $29 million provision
for patent litigation recorded in the third quarter of fiscal
year 2009 the Companys Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA). The minimum
Consolidated Adjusted EBITDA required prior to this amendment
was $20 million. The facility also has a minimum Fixed
Charge Coverage Ratio of Consolidated Adjusted EBITDA to
interest charges, cash tax and debt payments during the most
recent four quarters of 3 to 1 which replaces the previous
Consolidated Interest Coverage Ratio. The amendment also revises
the Consolidated Leverage Ratio which is the ratio of
consolidated indebtedness to Consolidated Adjusted EBITDA for
the four most recent fiscal quarters to 1.75 to 1 during the
fourth quarter of fiscal 2009, 2.85 to 1 for the first half of
fiscal 2010, 2.25 to 1 in the third quarter of fiscal 2010 and 2
to 1 thereafter. A violation of the covenants, including the
financial covenants, would result in event of default and
accelerate the repayment of all unpaid principal and interest
and the termination of any letters of credit. The maturity date
of this Line of Credit was also amended to June 10, 2011.
The Company was in compliance with all its financial covenants
as of April 30, 2009, as amended.
Interest on the Line of Credit is based on the banks prime
rate or LIBOR rate plus a percentage spread between 1.75% and
3.75% depending on whether the Company uses the banks
prime rate or LIBOR rate and its current leverage ratios. The
Company also pays an annual letter of credit fee equal to 1.25%
of the amount available to be drawn under each outstanding
letter of credit. The annual letter of credit fee is payable
quarterly in arrears and varies depending on its leverage ratio.
As of April 30, 2009, the Company had $19.9 million
available under its Line of Credit, net of $7.1 million in
outstanding standby letters of credit. These standby letters of
credit are primarily issued by the Companys bank to
certain Advanced segment customers as guarantees that milestone
payments made by such customers to the Company will be subject
to refund should the Company fail to perform under the governing
sales contracts.
Revolving
Credit Facility in Taiwan
The revolving credit facilities consist of three unsecured
credit facilities in Taiwan with a commitment totaling
$4.0 million at April 30, 2009, bearing interest at
2.80% per annum. The balance outstanding on these credit
facilities will mature within one year and may be extended for
like periods at the banks option.
|
|
Note 14
|
Fair
Value of Financial Instruments
|
The Company discloses and classifies fair value measurements in
one of the following three categories:
Level 1: Unadjusted quoted prices in
active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that
are not active or inputs which are observable, either directly
or indirectly, for substantially the full term of the asset or
liability;
Level 3: Prices or valuation techniques
that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no
market activity).
64
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company uses derivatives from time to time to mitigate the
effect of foreign currency fluctuations. The Company records
qualifying derivatives in accordance with Statement of Financial
Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133), and related amendments. Fair value
measurements for the Companys derivatives, which at
April 30, 2009, consisted primarily of foreign currency
forward contracts for which hedge accounting has not been
applied, are classified under Level 2 because such
measurements are determined using published market prices or
estimated based on observable inputs such as future exchange
rates. All such forward contracts had been settled as of
April 30, 2009. Accordingly, the Company had no financial
assets and liabilities that qualified for SFAS 157 fair
value measurement and disclosure.
Derivative
Instruments:
The Company selectively utilizes forward exchange rate contracts
to hedge its exposure to adverse exchange rate fluctuations on
foreign currency denominated accounts receivable and accounts
payable (both trade and inter-company). These forward contracts
have not been designated as hedges under SFAS 133. At the
end of each month, the Company marks the outstanding forward
contracts to market and records an unrealized foreign exchange
gain or loss for the mark-to-market valuation. As of
April 30, 2009, the Company did not have any open forward
contracts. The effect of derivative instruments on the Condensed
Consolidated Statement of Operations for the year ended
April 30, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the Statement of
Operations
|
|
|
|
Location of Gain or
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging
|
|
(Loss) Recognized in
|
|
|
April 30,
|
|
Instruments Under Statement 133
|
|
Income on Derivative
|
|
|
2009
|
|
|
2008
|
|
|
Forward exchange forward contracts
|
|
|
Other Income (Expense
|
)
|
|
$
|
1,232
|
|
|
$
|
113
|
|
There were no forward exchange contracts or other hedging
instruments used to hedge the Companys exposure to adverse
exchange rate fluctuations in the comparative prior periods. The
fair value of derivative instruments at April 30, 2009 and
April 30, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
April 30, 2009
|
|
|
April 30, 2008
|
|
|
April 30, 2009
|
|
|
April 30, 2008
|
|
|
|
Balance Sheet
|
|
|
Fair
|
|
|
Balance Sheet
|
|
|
Fair
|
|
|
Balance Sheet
|
|
|
Fair
|
|
|
Balance Sheet
|
|
|
Fair
|
|
|
|
Location
|
|
|
Value
|
|
|
Location
|
|
|
Value
|
|
|
Location
|
|
|
Value
|
|
|
Location
|
|
|
Value
|
|
|
Derivatives not designated as hedging instruments under
SFAS 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange rate contracts
|
|
|
Other Current Assets
|
|
|
$
|
|
|
|
|
Other Current Assets
|
|
|
$
|
|
|
|
|
Other Liabilities
|
|
|
$
|
|
|
|
|
Other Liabilities
|
|
|
$
|
113
|
|
|
|
Note 15
|
Commitments
and Contingencies
|
Our commitments and contingencies include:
|
|
|
|
|
Lease commitments;
|
|
|
|
Product liability claims; and
|
|
|
|
Legal proceedings.
|
Lease
Commitments
The Company rents certain facilities and equipment under
non-cancelable 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 $3.0 million,
$3.0 million and $2.9 million for the years ended
April 30, 2009, 2008 and 2007, respectively.
65
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum rents payable under operating leases for years
ending April 30 are as follows:
|
|
|
|
|
Year Ending April 30,
|
|
|
|
|
2010
|
|
$
|
3,284
|
|
2011
|
|
|
2,265
|
|
2012
|
|
|
1,533
|
|
2013
|
|
|
834
|
|
2014
|
|
|
69
|
|
2015 and thereafter
|
|
|
383
|
|
|
|
|
|
|
|
|
$
|
8,368
|
|
|
|
|
|
|
Product
Liability
Currently there are outstanding product liability claims arising
out of the sale of its current and former products. To minimize
the financial impact of product liability claims, the Company
purchases product liability insurance in amounts and under terms
considered acceptable to management.
Management periodically evaluates the merit of all claims,
including product liability claims, as well as considering
unasserted claims. Recoveries, if any, may be realized from
indemnitors, codefendants, insurers or insurance guaranty funds.
Management believes its insurance coverage is adequate to
satisfy any liabilities that are incurred.
Legal
Proceedings
At any time, the Company may be involved in legal proceedings in
addition to the OMAX, Crucible, and Collins and Aikman matters
described below. The Companys policy is to routinely
assess the likelihood of any adverse judgments or outcomes
related to legal matters, as well as ranges of probable losses.
A determination of the amount of the reserves required, if any,
for these contingencies is made after thoughtful analysis of
each known issue and an analysis of historical experience in
accordance with SFAS 5, and related pronouncements. The
Company records reserves related to legal matters for which it
is probable that a loss has been incurred and the range of such
loss can be estimated. With respect to other matters, management
has concluded that a loss is only reasonably possible or remote
and, therefore, no liability is recorded. Management discloses
the facts regarding material matters assessed as reasonably
possible and potential exposure, if determinable. Costs incurred
defending claims are expensed as incurred.
OMAX filed suit against the Company on November 18, 2004.
The case, OMAX Corporation v. Flow International
Corporation, United States District Court, Western Division at
Seattle, Case
No. CV04-2334,
was filed in federal court in Seattle, Washington. The suit
alleged that the Companys products infringed OMAXs
Patent Nos. 5,508,596 entitled Motion Control with
Precomputation and 5,892,345 entitled Motion Control
for Quality in Jet Cutting, (the OMAX
Patents). The suit also sought to have the Companys
Patent No. 6,766,216 entitled Method and System for
Automated Software Control of Waterjet Orientation
Parameters declared invalid, unenforceable and not
infringed. The Company had also brought claims against OMAX
alleging certain of their products infringed its Patent Nos.
6,766,216 and 6,996,452, the Flow Patents. OMAX
manufactures waterjet equipment that competes with the
Companys equipment. Both OMAXs and the
Companys patents are directed at the software that
controls operation of the waterjet equipment. The OMAX suit
sought damages of over $100 million.
In March 2009, the Company entered into a Settlement and Cross
Licensing Agreement with OMAX in which the parties agreed to
dismiss with prejudice the litigation pending between them,
releasing all claims made up to the date of execution of the
agreement. The Company agreed to pay $29 million to OMAX in
relation to this agreement of which $8 million was paid in
March 2009. Refer to Note 4 Discontinued
66
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operations, Mergers and Investments for further
discussion on how the remaining balance on the amount payable to
OMAX will be funded. Pursuant to SFAS 5, the amount payable
to OMAX was deemed probable and estimable prior to the filing of
the third quarter 2009
Form 10-Q
and a $29 million charge was therefore recorded in the
quarterly financial results for the period then ended.
Even though, neither party believes that it was infringing, the
parties entered into the Cross Licensing Agreement to prevent
any future litigation between the parties. OMAX granted the
Company a worldwide, irrevocable, non-assignable, non-exclusive
paid-up
license to practice each and every claim of the OMAX Patents
subject to the payment terms above. Such license includes the
right to make, have made, use or sell products that are covered
by any claim of the OMAX Patents, and to authorize the use or
resale by others of products made by or for the Company
and/or its
Affiliates that are covered by any claim of the OMAX Patents.
The Company also granted to OMAX a worldwide, irrevocable,
non-assignable, non-exclusive
paid-up
license to practice each and every claim of the Flow Patents.
In litigation arising out of a June 2002 incident at a Crucible
Metals (Crucible) facility, the Companys
excess insurance carrier notified the Company in December 2006
that it would contest its obligation to provide coverage for the
property damage. The Company believes the carriers
position is without merit, and following the commencement of a
declaratory judgment action, the carrier agreed to provide the
Company a defense. Following a recent mediation, the carrier
agreed to settle the claims of Crucible. The carrier has chosen
to continue to contest coverage for the settled claims relating
to this incident which total approximately $7 million and
the Company may spend substantial amounts to defend its
position. The Company intends to vigorously contest the
carriers claim; however, the ultimate outcome or
likelihood of this specific claim cannot be determined at this
time and an unfavorable outcome ranging from $0 to
$7 million is reasonably possible.
In June 2007, the Company received a claim seeking the return of
amounts paid by Collins and Aikman Corporation, a customer, as
preference payments. The amount sought is approximately
$1 million. The Company intends to vigorously contest this
claim; however, the ultimate outcome or likelihood of this
specific claim cannot be determined at this time and an
unfavorable outcome ranging from $0 to $1 million is
reasonably possible.
During the second quarter of fiscal year 2009, the Company was
notified by the purchaser of our Avure Business
(Purchaser), which was reported as discontinued
operations for the year ended April 30, 2006, that the
Swedish tax authority was conducting an audit which includes
periods during the time that the Company owned the subsidiary.
The Purchaser has indicated that it expects the Company to
indemnify its losses, if any, that result from any penalties and
fines assessed related to the tax audit for periods during which
the Company owned Avure. This tax audit is currently underway
and at this time, the Company is not able to quantify its
exposure, if any.
Other Legal Proceedings For matters other
than Omax, Crucible, Collins and Aikman and Avure described
above, the Company does not believe these proceedings will have
a material adverse effect on its consolidated financial
position, results of operations or cash flows.
|
|
Note 16
|
Shareholders
Equity
|
Preferred
Share Rights Purchase Plan
On June 7, 1990, the Board of Directors of the Company
adopted a Preferred Share Rights Purchase Plan (the
Plan). The Plan was amended and restated as of
September 1, 1999 and amended by Amendments No. 1 and
2 dated October 29, 2003 and October 19, 2004,
respectively. Pursuant to the Plan, as amended, 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 15% or more of the
Companys common stock or announces a tender offer, the
consummation of which would result in ownership by a person or
group of 15% or more of the common stock. Each Right entitles
shareholders to buy one one-hundredth of a share of
67
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Series B Junior Participating Preferred Stock (the
Series B Preferred Shares) of the Company at a
price of $45. If the Company is acquired in a merger or other
business combination transaction, each Right will entitle its
holder to purchase a number of the acquiring companys
common shares having a value equal to twice the exercise price
of the Right. If a person or group acquires 15% or more of the
Companys 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 Companys common
shares having a value equal to two times the exercise price of
the Right. Following the acquisition by a person or group of 15%
or more of the Companys 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 15% of the Companys common stock, the
Rights are redeemable, at the option of the Board, for $.0001
per Right. The Rights expire on September 1, 2009. The
Rights do not have voting or dividend rights, and until they
become exercisable, have no dilutive effect on the earnings of
the Company. There are no outstanding rights under this plan as
of April 30, 2009 and 2008.
Warrant
Repurchase
On October 25, 2007, in a privately negotiated transaction,
the Company purchased from certain funds managed or advised by
Third Point LLC (collectively, Third Point)
outstanding warrants that gave Third Point the right until March
of 2010 to purchase 403,300 of the Companys common stock
at an exercise price of $4.07 per share (the
Warrants). Third Point purchased the Warrants,
together with shares of common stock, in the Companys
March 2005 Private Investment Public Equity transaction (the
PIPE Transaction). The Warrants were repurchased
from Third Point in connection with the Companys
previously announced program to repurchase up to
$45 million of the Companys securities. The Warrants
were repurchased at a price of $7.43 per Warrant for an
aggregate purchase price of $3 million. In accordance with
FASB Technical Bulletin (FTB)
No. 85-6,
the total fair value of the repurchased warrants of
$2.4 million was accounted for as the cost of the warrants
and was included as a reduction to capital in excess of par
within the Companys total stockholders equity in
fiscal year 2008. The cash paid in excess of the fair market
value of those warrants of $629,000 was charged against income
as Other Expense in fiscal year 2008. The total fair value of
the warrants was estimated using the Black-Scholes pricing
model, based on the following assumptions: (i) no expected
dividend yields; (ii) expected volatility rate of 60%; and
(iii) an expected life of 28 months based on the
remaining contractual life of the Warrants. The risk-free
interest rate applied was 4.12% based on U.S. Treasury
constant maturity interest rate whose term is consistent with
the expected life of the Companys stock options. Third
Point was the last holder of warrants issued in the PIPE
Transaction; all other warrants had been converted.
|
|
Note 17
|
Stock-based
Compensation
|
The Company recognizes share-based compensation expense under
the provisions of Statement of Financial Account Standard
No. 123(R), Share-Based Payment
(SFAS 123(R)) which requires the measurement
and recognition of compensation expense for all share-based
payment awards to employees and directors, including employee
stock options, based on fair value. The Company maintains a
stock-based compensation plan (the 2005 Plan) which
was adopted in September 2005 to attract and retain the most
talented employees and promote the growth and success of the
business by aligning long-term interests of employees with those
of shareholders. The 2005 Plan provides for a pool of
2.5 million shares which the Company, at its discretion,
may choose to grant in the form of stock, stock units, stock
options, stock appreciation rights, or cash awards.
68
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The Company grants common stock options to employees and
directors of the Company with service
and/or
performance conditions. The compensation cost of service
condition stock options is based on their fair value at the
grant date and recognized ratably over the service period.
Compensation cost of stock options with performance conditions
is based upon current performance projections and the percentage
of the requisite service that has been rendered. All options
become exercisable upon a change in control of the Company
unless the surviving company assumes the outstanding options or
substitutes similar awards for the outstanding awards of the
2005 Plan. Options are granted with an exercise price equal to
the fair market value of the Companys common stock on the
date of grant. The maximum term of options is 10 years from
the date of grant.
The following tables summarize the stock option activities for
the year ended April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Term (Years)
|
|
|
Outstanding at April 30, 2008
|
|
|
773,500
|
|
|
$
|
10.53
|
|
|
$
|
195,801
|
|
|
|
3.98
|
|
Granted during the period
|
|
|
236,210
|
|
|
|
9.77
|
|
|
|
|
|
|
|
|
|
Exercised during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired or forfeited during the period
|
|
|
(210,900
|
)
|
|
|
6.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2009
|
|
|
798,810
|
|
|
$
|
10.49
|
|
|
$
|
|
|
|
|
5.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2009
|
|
|
442,600
|
|
|
$
|
10.52
|
|
|
$
|
|
|
|
|
2.32
|
|
Vested at April 30, 2009
|
|
|
442,600
|
|
|
|
10.52
|
|
|
|
|
|
|
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total intrinsic value of options exercised
|
|
$
|
|
|
|
$
|
1,262
|
|
|
$
|
776
|
|
Total fair value of options vested
|
|
|
345
|
|
|
|
|
|
|
|
211
|
|
Cash received from exercise of share options
|
|
|
|
|
|
|
1,198
|
|
|
|
1,518
|
|
Tax benefit realized from stock options exercised
|
|
|
|
|
|
|
291
|
|
|
|
|
|
The Company uses the Black-Scholes option-pricing model to
calculate the grant-date fair value of its stock options.
Information pertaining to the Companys assumptions to
calculate the fair value of the stock options granted during the
two years ended April 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Options granted
|
|
|
236,210
|
|
|
|
200,000
|
|
|
|
21,250
|
|
Weighted average grant-date fair value of stock options granted
|
|
$
|
5.67
|
|
|
$
|
6.90
|
|
|
$
|
4.76
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average expected volatility
|
|
|
60.00
|
%
|
|
|
62.02
|
%
|
|
|
61.86
|
%
|
Risk-free interest rate
|
|
|
3.09
|
%
|
|
|
4.98
|
%
|
|
|
4.97
|
%
|
Weighted average expected term (in years)
|
|
|
6
|
|
|
|
6
|
|
|
|
2
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses historical volatility in estimating expected
volatility and historical employee exercise activity and option
expiration data to estimate the expected term assumption for the
Black-Scholes grant-date
69
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
valuation. The risk-free interest rate assumption is based on
U.S. Treasury constant maturity interest rate whose terms
are consistent with the expected term of the Companys
stock options. The Company has not declared or paid any cash
dividends on its Common Stock and does not anticipate that any
dividends will be paid in the foreseeable future.
For the respective years ended April 30, 2009, 2008 and
2007, the Company recognized compensation expense related to
stock options of $600,000, $172,000, and $344,000, net of
reversal of $101,000 in fiscal year 2008 related to prior year
stock options whose performance criteria were not met. As of
April 30, 2009, total unrecognized compensation cost
related to nonvested stock options was $911,000 which is
expected to be recognized over a weighted average period of
2.68 years.
Service-Based
Stock Awards
The Company grants common stock or stock units to employees and
non-employee directors of the Company with service conditions.
Each non-employee director is eligible to receive and is granted
common stock worth $40,000 annually. The compensation cost of
the common stock or stock units are based on their fair value at
the grant date and recognized ratably over the service period.
The following table summarizes the service-based stock award
activities for employees for the two years ended April 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at May 1, 2007
|
|
|
72,533
|
|
|
$
|
9.33
|
|
Granted during the period
|
|
|
296,773
|
|
|
|
7.86
|
|
Forfeited during the period
|
|
|
(6,650
|
)
|
|
|
13.05
|
|
Vested during the period
|
|
|
(37,207
|
)
|
|
|
7.87
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2008
|
|
|
325,449
|
|
|
|
8.06
|
|
Granted during the period
|
|
|
192,143
|
|
|
|
9.77
|
|
Forfeited during the period
|
|
|
(38,386
|
)
|
|
|
8.74
|
|
Vested during the period
|
|
|
(76,651
|
)
|
|
|
8.54
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2009
|
|
|
402,555
|
|
|
$
|
8.72
|
|
|
|
|
|
|
|
|
|
|
For the respective years ended April 30, 2009, 2008 and
2007, the Company recognized compensation expense related to
service-based stock awards of $1.1 million, $732,000 and
$655,000. As of April 30, 2009, total unrecognized
compensation cost related to service-based stock awards of
$2.8 million is expected to be recognized over a weighted
average period of 3.0 years.
Performance-Based
Stock Awards
In fiscal year 2007, the Company adopted Long-Term Incentive
Plans (the LTIPs) under which the executive officers
are to receive stock awards based on certain performance
targets, which were to be measured over a three-year performance
period. Awards to be granted will vary based on the degree to
which the Companys performance meets or exceeds these
predetermined thresholds at the end of the performance period.
No payout will occur unless the Company exceeds certain minimum
threshold performance targets. Compensation expense is based
upon current performance projections for the three-year period
and the percentage of the requisite service that has been
rendered. Compensation cost for the unvested portion of the LTIP
awards is based on its grant-date fair value. The LTIPs permit
employees to elect to net-settle a portion
70
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the award paid in stock to meet the employees share of
minimum withholding requirements, which the Company accounts for
as equity.
The following table summarizes the LTIPs activities for the two
years ended April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at May 1, 2007
|
|
|
181,500
|
|
|
$
|
10.71
|
|
Granted during the period
|
|
|
|
|
|
|
|
|
Cancelled during the period
|
|
|
(69,000
|
)
|
|
|
7.81
|
|
Forfeited during the period
|
|
|
(38,000
|
)
|
|
|
10.51
|
|
Vested during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2008
|
|
|
74,500
|
|
|
$
|
13.50
|
|
Granted during the period
|
|
|
|
|
|
|
|
|
Cancelled during the period
|
|
|
|
|
|
|
|
|
Forfeited during the period
|
|
|
(74,500
|
)
|
|
|
13.50
|
|
Vested during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company did not recognize any compensation expense related
to LTIPs for the respective years ended April 30, 2009,
2008 and 2007 as the achievement of the performance criteria was
not deemed probable. As of April 30, 2009, there was no
unrecognized compensation cost related to performance-based
stock awards.
The components of consolidated income (loss) before income taxes
include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income (Loss) from Continuing Operations Before Provision
(Benefit) for Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(26,708
|
)
|
|
$
|
11,546
|
|
|
$
|
(3,557
|
)
|
Foreign
|
|
|
(4,608
|
)
|
|
|
3,748
|
|
|
|
10,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(31,316
|
)
|
|
$
|
15,294
|
|
|
$
|
7,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision (benefit) for income taxes is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal
|
|
$
|
(72
|
)
|
|
$
|
298
|
|
|
$
|
103
|
|
State
|
|
|
89
|
|
|
|
124
|
|
|
|
52
|
|
Foreign
|
|
|
1,453
|
|
|
|
4,053
|
|
|
|
2,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Tax Expense (after NOL Benefit of $868, $6,312, and
$3,147)
|
|
|
1,470
|
|
|
|
4,475
|
|
|
|
2,792
|
|
Federal
|
|
|
(8,105
|
)
|
|
|
(9,347
|
)
|
|
|
|