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,
2010
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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 01-34443
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:
Common Stock, $.01 Par Value
Common Share Purchase Rights
Name of each exchange on which registered:
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the
Act:
None
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
$109,406,057 as of October 31, 2009, the last business day
of the registrants most recently completed second fiscal
quarter, based on a closing price of $2.41 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 46,991,027 shares of Common Stock,
$0.01 par value per share, outstanding as of June 22,
2010.
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, 2010 (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, including introduction of new products
and realignment of our existing product line;
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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 will enable us to absorb the economic downturn with less
impact than conventional machine tool manufacturers;
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statements regarding our ability to solidify our position as
we exit the recession by introducing new products, repositioning
our products, expanding our indirect sales channel of
distribution, realigning our manufacturing footprint and
ensuring that we have the appropriate capital structure to
facilitate growth and investments;
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statements regarding our expectation that expanding our
indirect sales channel will help us capture a leading market
share globally;
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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 Senior 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 and available amounts under our Senior Credit
Facility, 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 our ability to effectively manage our
sales force and indirect sales channel;
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statements regarding anticipated results of potential or
actual litigation;
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statements regarding the realizability of our deferred tax
assets and 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, surface preparation and
cleaning solutions. Our ultrahigh-pressure water pumps generate
pressures from 40,000 to over 94,000 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 methods, which utilize lasers, saws, knives, shears,
plasma, routers, drills, soda blasting 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, 2010.
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:
Prior to the 1990s, we:
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invented the abrasive waterjet; and
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led the waterjet industry in the use of pure waterjet cutting
for disposable diapers and tissue paper.
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In the 1990s, we;
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developed the first 55,000 psi direct drive pumps;
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developed the first 60,000 psi intensifier and the first 87,000
psi intensifier;
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introduced
WindowsR-based
intelligent waterjet control software
FlowMastertm
to the industry for abrasive waterjet flat stock cutting machine
tools;
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developed the first fully integrated cutting machine tool with
all functions and diagnostic sensors centralized at the operator
control station;
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invented the UltraPierce accessory for the piercing of
composites, stone, glass, ceramics without delaminating or
breakage of material during the drilling process; and
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developed the first multi-process
3-dimensional
cutting large envelope machines for trimming and drilling of
composite aerospace wings and structures using abrasive
waterjet, routers, and inspection
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In the 2000s, we:
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invented Dynamic
Waterjet®
with Active Tolerance Control to produce parts two to four times
faster and with tolerances down to one to three thousandths of
an inch;
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invented the first collision and height sensor, the Dynamic
Contour Follower, for Dynamic
Waterjet®
applications;
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developed the first 94,000 psi rated intensifier pump for
commercial cutting applications;
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developed the first extremely high speed pure waterjet machine,
the Sonic, for gasket and foam production; and
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introduced Dynamic Waterjet XD, a
3-dimentional
waterjet cutting technology that uses
SmartStreamtm.
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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, surface preparation and cleaning
solutions to our customers. Our machines require significant
capital outlay across all market segments.
The deterioration in global economic conditions, that started in
fiscal 2009, and the instability in the stock market and
tightening of credit markets caused a reduction in capital
spending which negatively impacted our business. In fiscal year
2010, our primary focus was on managing our cash flow and
maintaining sufficient liquidity as result of the economic
conditions. In fiscal 2011, we intend to continue focusing on
generating positive cash flow, performing better than the market
in each of our business segments, and, as our revenues grow,
taking advantage of our market position and ability to scale. In
the longer term, our strategy is to continue to introduce the
highest quality products with the most innovative technology at
a rate faster than our competitors; to distribute products
through a model that benefits our shareholders
leveraging our direct sales force and continuing to pursue
additional channels and partners for distribution; to provide
world-class service to our customers; to develop and maintain
low-cost manufacturing processes and continually improve
productivity and efficiency; and to attract and retain skilled
and knowledgeable people. These factors will promote our ability
to grow from expansion of our existing businesses.
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, surface preparation 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. We
launched a new Mach Series of waterjet cutting equipment which
feature the next generation of waterjet technology in fiscal
year 2010. Our new Mach Series consists of three distinct
product lines: the Mach 4, Mach 3, and Mach 2, all of which
offer complete systems solutions to address a full array of
customer needs while delivering the widest range of
capabilities, technologies and price in the industry.
The primary components of our product line include versatile
waterjet cutting, surface preparation and industrial cleaning
systems which provide total system solutions for various
industries including aerospace, metalworking, stone and tile,
job shop, automotive, industrial surface preparation and
cleaning.
Our ultrahigh-pressure technology has two broad applications:
cutting and surface preparation 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 94,000 rated psi, and forces it through a small
orifice, generating a stream of water traveling at supersonic
speeds. 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,
either
2-dimensionally
or
3-dimensionally.
Our systems may also combine waterjet with other applications
such as material handling, conventional machining, routing
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 can deliver water
continuously at up to 94,000 psi, and our direct drive pumps 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, wire electronic data machines, saws or
plasma. It offers greater versatility in the types of products
it can cut, and, because it cuts without creating appreciable
heat or mechanical stress and
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often reduces or eliminates the need for secondary processing
operations and special fixturing. 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.
Surface Preparation and Industrial Cleaning
Products. Our ultrahigh-pressure surface
preparation and industrial cleaning systems are used in waterjet
cleaning for fast coating removal. 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 and
reduces containment and cleanup issues. 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 parts are proprietary in nature and are
patent protected. We also sell various tools and accessories
which incorporate ultrahigh-pressure technology.
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 still in the early adoption phase of its product
life cycle. These efforts include presence at tradeshows,
advertising in print media and other product placements and
demonstration/educational events as well as an increase in
domestic and international sales representation, including
distributors. To enhance sales efforts, our marketing staff and
sales force gather detailed information on 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 consumable parts through the Internet at our
www.flowparts.com website in the U.S. and
www.floweuropeparts.com in Europe. 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. Our largest customer in the Advanced segment (refer
to our discussion on our Business Segments below)
Airbus - accounted for approximately 11% of consolidated sales
in fiscal year 2010. 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 and 2008.
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 as we exit 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, fabricating and surface preparation, will enable us
to continue weathering the economic downturn better 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. With
the launch of our latest Mach Series technology releases, we now
have waterjet systems that match our diverse customers
applications and budgets. Under the Flow brand, we
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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 Mach 2
series, 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 revenue potential
or more than 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 consumable parts and
services. 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
consumable parts.
Business
Segments
We report our operating results to our Chief Executive Officer,
who is the chief operating decision maker, based on market
segments which is consistent with managements long-term
growth strategy. Our reportable segments are Standard and
Advanced. The Standard segment includes sales and cost of sales
related to our cutting, surface preparation 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 cost of sales related to
our complex Advanced segment systems which require specific
custom configuration and advanced features, including robotics,
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 17 Business Segments and Geographic
Information 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 2010, 59% or
$102.7 million of our total consolidated sales
were to customers outside the United States, this included:
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$33.1 million of exports from the United States;
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$31.5 million of sales from Europe; and
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$38.1 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 quality, delivery
and cost. 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
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risks associated with this reliance on the supply chain. Some of
our business units purchase these items from sole or limited
source suppliers
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
product enhancements and to leverage quality and cost benefit.
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
We strive to improve our competitive position in all of our
segments by continuously investing in research and development
to drive innovation in our products and manufacturing
technologies. Our research and development investments support
the introduction of new products and enhancements to existing
products. During the year ended April 30, 2010, we expensed
$8.1 million related to product research and development as
compared to $8.6 million in fiscal year 2009 and
$8.3 million in fiscal year 2008. Research and development
expenses as a percentage of revenue were between 3% and 5%
during each of the respective years ended April 30, 2010,
2009, and 2008. In light of the economic downturn, we have
undertaken significant efforts to reduce our fixed and variable
expenses to adjust our total cost structure to current market
conditions. However, reductions in research and development
expenses in fiscal year 2010 were minimal, reflecting our
ongoing commitment to being the worldwide leader in waterjet
technology.
Backlog
Our backlog increased 3.5% from $45.7 million at
April 30, 2009 to $47.3 million at April 30,
2010. The backlog at April 30, 2010 and 2009 represented
27% and 22% of our trailing twelve months sales as of
April 30, 2010 and 2009, 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 for customized equipment during the
manufacturing of these products or prior to product shipment.
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Employees
We had 594 full time employees as of April 30, 2010
compared to 649 and 759 for the respective years ended
April 30, 2009 and 2008, with 65% 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.
Available
Information
We are subject to the reporting requirements of the Exchange Act
and its rules and regulations. The Exchange Act requires us to
file reports, proxy statements and other information with the
U.S. Securities and Exchange Commission (SEC).
Copies of these reports, proxy statements and other information
can 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.
The SEC maintains a Web site that contains reports, proxy
statements and other information regarding issuers that file
electronically with the SEC. These materials may be obtained
electronically by accessing the SECs Web site at
www.sec.gov.
We make available, free of charge on our Web site, our Annual
Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file these
documents with, or furnish them to, the SEC. These documents are
posted on our Web site at www.flowcorp.com
select the Investor Relations link and then the
Reports link.
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.
Risks
Related to our Business
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.
Failure
to effectively manage our indirect sales channel could adversely
affect our results of operations and financial
condition.
In order to expand sales and capture a leading market share
globally, we have recently focused on establishing an indirect
sales channel, through distributors and sales agents, to augment
our existing direct sales force. Our success in integrating this
indirect sales channel into our business will be impacted by our
ability to train and manage new and existing relationships with
distributors and sales agents. If we are not able to effectively
train and manage our indirect sales channel, we may not be able
to achieve our operating results and this could have a negative
effect on our operating results and financial condition.
Foreign
currency exchange rates and commodity prices may adversely
affect our results of operations and financial
condition.
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
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at the applicable exchange rates. We are therefore exposed to
movements in foreign exchange rates against the
U.S. Dollar. Of these, the most significant is currently
the Euro. A portion of our sales to our customers and operating
costs in Europe are denominated in Euro creating an exposure to
foreign currency exchange rates. Additionally, certain of our
foreign subsidiaries make sales denominated in U.S. Dollars
which expose them to foreign currency transaction gains and
losses.
In addition, we are a large buyer of steel, as 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.
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.
Our
operations may be impaired as a result of disasters, business
interruptions or similar events.
Disasters and business interruptions such as earthquakes,
flooding, fire, and electrical failure affecting our operating
activities and major facilities could materially and adversely
affect our operations, our operating results and financial
condition. In particular, our facility in Kent, Washington,
which is our headquarters and the primary manufacturing facility
for our ultra-high pressure pumps, is in close proximity to the
Green River which currently has an increased risk of flooding
over the next 3 to 5 years because of the structural
integrity of a dam on the river. If such flooding occurs, it
could be extremely disruptive to our business and could
materially and adversely affect our operations, operating
results and financial condition. We have developed a disaster
recovery plan to mitigate the negative results of such an
occurrence, however, the implementation and execution of such
plans may not be adequate.
The
recent economic recession and its impact on the credit markets
could adversely affect our results of operations and access to
capital.
The economic recession and the impact that it has had on the
financial and credit markets has resulted in 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
lingering effects of these events, they may impair our
customers ability to borrow money or raise capital for
their operations.
Volatile market conditions could:
|
|
|
|
|
adversely affect our ability to access credit markets or raise
capital on terms acceptable to us;
|
|
|
|
limit our capital expenditures for repair or replacement of
existing facilities or equipment;
|
|
|
|
adversely affect our ability to be in compliance with covenants
under existing credit agreements;
|
|
|
|
have an adverse effect on our customers and suppliers and their
ability to purchase our products; and
|
|
|
|
reduce our ability to take advantage of growth and expansion
opportunities.
|
10
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 Line of Credit agreement requires us to comply with or
maintain certain financial tests and ratios and restrict our
ability to:
|
|
|
|
|
draw down on our existing line of credit or incur more debt;
|
|
|
|
make certain investments and payments;
|
|
|
|
fund additional letters of credit;
|
|
|
|
pay cash dividends; and
|
|
|
|
transfer or sell assets.
|
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.
We may
need to raise additional funds to finance our future capital
and/or operating needs.
In September 2009, we completed an underwritten public offering
of 8,998,750 common shares at an offering price of $2.10 per
share, generating net proceeds of approximately
$17.2 million after deducting underwriting commissions and
estimated offering expenses. We may need to raise additional
funds through public or private debt or sale of equity to
achieve our current business strategy in future periods. 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 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.
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
11
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.
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, 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 realizability 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 our
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, 2010, we had approximately $24 million of
net deferred tax assets.
International
economic, political, legal and business factors could negatively
affect our results of operations, cash flows and financial
condition.
In fiscal year 2010, approximately 59% 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;
|
|
|
|
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;
|
12
|
|
|
|
|
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 the completion
of this upgrade in all our locations, 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 during fiscal year 2010. 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 22, 2010, the closing price of our common stock was
$2.48. Our stock price could decline or be subject to wide
fluctuations in 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 been the
target of a hostile takeover or subject to involvement by
activist shareholders. If litigation of this type is 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 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
13
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.
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
a discontinued operation for the year ended April 30, 2006,
that the Swedish tax authority was conducting an audit which
includes periods during the time that we owned the subsidiary.
Pursuant to our agreement with the Purchaser, we had made
commitments to indemnify various liabilities and claims,
including any tax matters when we owned the business. The
Swedish tax authority concluded its audit and issued a final
report in November 2009 asserting that Avure owes
19.5 million Swedish Krona in additional taxes, penalties
and fines. In April 2010, we filed an appeal to contest the
findings by the Swedish Tax Authority. While we intend to
continue contesting the findings, the ultimate outcome of this
matter is uncertain and an unfavorable outcome ranging from $0
to the assessed $1.2 million is reasonably possible. An
equivalent of $1.2 million was accrued during the current
fiscal year related to the periods during which we owned Avure.
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. Some 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.
14
|
|
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, 2010.
We occupied approximately 362 thousand square feet of floor
space on April 30, 2010 for manufacturing, warehousing,
engineering, sales offices, and administration, of which
approximately 58% was located in the United States.
The following table provides a summary of the floor space by
segment:
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
Leased
|
|
|
|
(In square feet)
|
|
|
Standard
|
|
|
15,800
|
|
|
|
283,500
|
|
Advanced
|
|
|
40,200
|
|
|
|
22,200
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
56,000
|
|
|
|
305,700
|
|
|
|
|
|
|
|
|
|
|
We have operations at the following locations:
|
|
|
|
|
Standard Kent, Washington, which is our
headquarters and the primary ultrahigh-pressure pump
manufacturing facility; Jeffersonville, Indiana, a manufacturing
facility for some components of our Standard systems; Yokohama
and Nagoya, Japan; Shanghai, Guangzhou 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, the primary
manufacturing facility for our Advanced systems.
|
We believe that our principal properties are adequate for our
present needs and, supplemented by planned improvements, expect
them to remain adequate for the foreseeable future.
|
|
Item 3.
|
Legal
Proceedings
|
Refer to Note 13 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.
|
(Removed
and Reserved)
|
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 2010
|
|
Fiscal Year 2009
|
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
First Quarter
|
|
$
|
1.70
|
|
|
$
|
2.87
|
|
|
$
|
5.05
|
|
|
$
|
11.40
|
|
Second Quarter
|
|
|
1.96
|
|
|
|
2.91
|
|
|
|
2.86
|
|
|
|
10.19
|
|
Third Quarter
|
|
|
2.32
|
|
|
|
4.08
|
|
|
|
1.21
|
|
|
|
4.10
|
|
Fourth Quarter
|
|
|
2.74
|
|
|
|
4.00
|
|
|
|
1.05
|
|
|
|
1.98
|
|
15
Holders
of the Companys Common Stock
As of June 22, 2010, there were approximately 1,004 holders
of record of our common stock.
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. Refer to Note 11 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, 2010 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
|
|
|
628,082
|
|
|
$
|
10.48
|
|
|
|
4,173,211
|
|
Equity Compensation Plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
628,082
|
|
|
$
|
10.48
|
|
|
|
4,173,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For more detailed information regarding the Companys
equity compensation plans, refer to Note 15
Stock-based Compensation to the Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data.
16
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.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Flow International Corporation, The S&P Smallcap 600
Index.
The NASDAQ Composite Index And The Dow Jones US Industrial
Machinery Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/05
|
|
|
4/06
|
|
|
4/07
|
|
|
4/08
|
|
|
4/09
|
|
|
4/10
|
Flow International Corporation
|
|
|
|
100.00
|
|
|
|
|
228.38
|
|
|
|
|
196.62
|
|
|
|
|
169.43
|
|
|
|
|
30.74
|
|
|
|
|
53.38
|
|
S&P Smallcap 600
|
|
|
|
100.00
|
|
|
|
|
131.39
|
|
|
|
|
141.45
|
|
|
|
|
128.65
|
|
|
|
|
89.99
|
|
|
|
|
132.99
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
121.25
|
|
|
|
|
134.58
|
|
|
|
|
127.40
|
|
|
|
|
89.92
|
|
|
|
|
129.99
|
|
Dow Jones US Industrial Machinery
|
|
|
|
100.00
|
|
|
|
|
84.87
|
|
|
|
|
88.46
|
|
|
|
|
100.13
|
|
|
|
|
59.62
|
|
|
|
|
97.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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, 2005 and tracks it through to
April 30, 2010.
|
|
|
|
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.
17
|
|
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,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007(1)
|
|
2006(1)
|
|
|
(In thousands, except per share amounts)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
173,749
|
|
|
$
|
210,103
|
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
|
$
|
202,658
|
|
Income (Loss) From Continuing Operations
|
|
|
(7,389
|
)
|
|
|
(23,086
|
)
|
|
|
21,911
|
|
|
|
4,022
|
|
|
|
7,047
|
|
Net Income (Loss)
|
|
|
(8,484
|
)
|
|
|
(23,819
|
)
|
|
|
22,354
|
|
|
|
3,755
|
|
|
|
6,677
|
|
Basic Income (Loss) Per Share From Continuing Operations
|
|
|
(0.17
|
)
|
|
|
(0.61
|
)
|
|
|
0.59
|
|
|
|
0.11
|
|
|
|
0.20
|
|
Basic Net Income (Loss) Per Share
|
|
|
(0.19
|
)
|
|
|
(0.63
|
)
|
|
|
0.60
|
|
|
|
0.10
|
|
|
|
0.19
|
|
Diluted Income (Loss) Per Share From Continuing Operations
|
|
|
(0.17
|
)
|
|
|
(0.61
|
)
|
|
|
0.58
|
|
|
|
0.11
|
|
|
|
0.19
|
|
Diluted Net Income (Loss) Per Share
|
|
|
(0.19
|
)
|
|
|
(0.63
|
)
|
|
|
0.59
|
|
|
|
0.10
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital
|
|
$
|
31,913
|
|
|
$
|
27,923
|
|
|
$
|
56,126
|
|
|
$
|
43,108
|
|
|
$
|
41,857
|
|
Total Assets
|
|
|
131,209
|
|
|
|
144,960
|
|
|
|
151,155
|
|
|
|
123,172
|
|
|
|
119,301
|
|
Short-Term Obligations
|
|
|
411
|
|
|
|
16,593
|
|
|
|
2,095
|
|
|
|
7,188
|
|
|
|
3,247
|
|
Long-Term Obligations, net(2)
|
|
|
7,972
|
|
|
|
1,937
|
|
|
|
2,333
|
|
|
|
2,779
|
|
|
|
3,774
|
|
Shareholders Equity
|
|
|
75,624
|
|
|
|
62,711
|
|
|
|
86,064
|
|
|
|
61,224
|
|
|
|
56,557
|
|
|
|
|
(1) |
|
Our consolidated statements of operations for fiscal years 2007
and 2006 have been recast to reflect the results of operations
of our CIS Technical Solutions division as discontinued
operations. |
|
(2) |
|
Fiscal year 2010 long-term obligations includes
$8.0 million related to subordinated notes issued to OMAX
pursuant to the terms of the amended Merger Agreement and the
Settlement and Cross Licensing Agreement which is discussed in
Note 18 Provision for Patent Litigation and
Termination of OMAX Merger Agreement to the Consolidated
Financial Statements included in Item 8, Financial
Statements and Supplementary Data. |
18
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
In this discussion and analysis, we discuss and explain our
financial condition and results of operations, including:
|
|
|
|
|
Factors which might affect our business;
|
|
|
|
Our earnings and costs in the periods presented;
|
|
|
|
Changes in earnings and costs between periods;
|
|
|
|
Impact of these factors on our overall financial condition;
|
|
|
|
Expected future expenditures for capital projects; and
|
|
|
|
Expected sources of cash for future operations and capital
expenditures.
|
As you read this discussion and analysis, refer to our
Consolidated Statements of Operations included in
Item 8 Financial Statements and
Supplementary Data, which presents the results of our
operations for the respective years ended April 30, 2010,
2009 and 2008. We analyze and explain the differences between
the periods in the specific line items of our Consolidated
Statements of Operations. This discussion and analysis has been
organized as follows:
|
|
|
|
|
Executive Summary, including overview, and business strategy;
|
|
|
|
Significant events that are important to understanding the
results of our operations and financial condition;
|
|
|
|
Results of operations beginning with an overview of our results,
followed by a detailed review of those results by reporting
segment;
|
|
|
|
Financial condition addressing liquidity position, sources and
uses of cash, capital resources and requirements, commitments,
and off-balance sheet arrangements; and
|
|
|
|
Critical accounting policies which require managements
most difficult, subjective or complex judgment.
|
Certain other statements in Managements Discussion and
Analysis are forward-looking as defined in the Private
Securities Litigation Reform Act of 1995. 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.
Executive
Summary
Overview
and Outlook
We are a technology-based global company whose objective is to
deliver profitable dynamic growth by providing technologically
advanced waterjet cutting, surface preparation 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.
In fiscal year 2010, we continued certain activities in order to
operate effectively in a challenging economy while maintaining
our strategic objective to solidify our leadership position in
our industry and positioning ourselves to take advantage of
market opportunities when we exit the recession by:
|
|
|
|
|
Repositioning our existing product offerings and introducing new
products to address customer needs;
|
|
|
|
Expanding our indirect sales channel of distribution;
|
19
|
|
|
|
|
Focusing on cost reduction initiatives across the organization
through the resizing and realignment of our manufacturing
operations and organizational structure; and
|
|
|
|
Ensuring that we have the appropriate capital structure to
facilitate growth and investments.
|
Actions in support of our strategic objective in fiscal year
2010 included the following:
Repositioning
our Products, Investing in New Products, and Enhancing Global
Customer Access through Indirect Sales Channel
|
|
|
|
|
Launched a new Mach Series of waterjet cutting equipment which
feature the next generation of waterjet technology in fiscal
year 2010. Our new Mach Series consists of three distinct
product lines: the Mach 4, Mach 3, and Mach 2, all of which
offer complete systems solutions to address a full array of
customer needs while delivering the widest range of
capabilities, technologies and price in the industry;
|
|
|
|
Introduced Dynamic Waterjet XD, a
3-dimentional
waterjet cutting technology that uses
SmartStreamtm
technology; and
|
|
|
|
Added a full second channel of distribution by adding 41
distributors in 33 countries since the beginning of calendar
year 2009. This indirect sales channel will augment our existing
direct sales force and primarily focus on selling mid to lower
priced products.
|
Cost
Reduction Initiatives and Manufacturing Realignment
|
|
|
|
|
Reduced our fixed-cost structure compared to fiscal year 2009 by
approximately $6 million through the elimination of
30 full-time positions globally and the culmination of the
plan to consolidate our manufacturing operations to two
factories by completing the shutdown of our Taiwan manufacturing
plant;
|
|
|
|
Temporarily reduced wages for majority of our salaried employees
and suspended certain employee benefits rather than instituting
mass layoffs to ensure that we can effectively address growth in
the future. While these temporary wage reductions and benefit
suspensions helped us to weather the storm in a turbulent time,
they did not fit into our long-term strategy of attracting and
retaining skilled and knowledgeable people. We therefore began
reinstating some of these wages and employee benefits, that had
been temporarily suspended in the third quarter of fiscal year
2010, following the second sequential quarter of revenue growth
since the recession began. We will continue to carefully monitor
our sales volume and other economic indicators and review our
ability to reinstate the remaining temporary cost reductions on
a phased-in approach.
|
Appropriate
Capital Structure and Use of Funds to Invest in the
Business
|
|
|
|
|
Reduced our near-term and long-term debt obligations, including
amounts outstanding under our Senior Credit Facility, through
the sale of our manufacturing facility in Taiwan for
$4.7 million following the consolidation of our
manufacturing footprint and through a public offering of
8,998,750 common shares at an offering price of $2.10 per share,
which included 1,173,750 shares issued as a result of the
underwriter fully exercising its over-allotment option. This
offering, which was completed in September 2009, generated net
proceeds of approximately $17.2 million after deducting
underwriting commissions and estimated offering expenses;
|
|
|
|
Amended our Senior Credit Facility in August 2009. This
amendment revised the financial covenants that we are required
to maintain, providing us with more financial flexibility to
operate our business in a challenging economic environment;
|
|
|
|
Continued to invest in our new Enterprise Resource Planning
system and information technology infrastructure which we
believe will provide a means to improve business intelligence
and the distribution of information across the
organization; and
|
|
|
|
Leveraged lean manufacturing initiatives to increase our
capacity utilization and productivity.
|
20
We will continue to focus strongly on working capital management
and cash flow generation. In addition, while we will continue to
invest in our business, it will be limited to a few specific
strategic initiatives. These efforts may 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 emerge as a stronger and
more viable company when we exit the recession.
Matters
Affecting Comparability
The following events occurred in the respective years ended
April 30, 2010, 2009 and 2008, which we believe impact the
comparability of our results of operations:
Restructuring
and Other Operating Charges
We implemented certain initiatives to improve our cost
structure, better utilize overall capacity and improve general
operating efficiencies. During the respective years ended
April 30, 2010 and 2009, we recorded charges of
$1.0 million and $3.1 million related to these
restructuring activities.
Further in fiscal year 2009, under ASC 805,
Business Combinations, we expensed
$3.8 million of previously deferred direct transaction
costs which had been capitalized as part of the contemplated
acquisition cost of OMAX as it was deemed probable that the
contemplated merger with OMAX would not close prior to the
adoption of ASC 805 on May 1, 2009.
Provision
for Patent Litigation and Termination of OMAX Merger
Agreement.
In March 2009, we 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. We 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;
|
|
|
|
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 have been consummated by
August 15, 2009, the entire amount would have been applied
towards the $75 million purchase price. However, in the
event the merger would not have been consummated by
August 15, 2009, the $15 million held in escrow was to
be released to OMAX on August 16, 2009 and we were to issue
a promissory note in the principal 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 our
option; and
|
|
|
|
In the event the merger would have been 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 have been consummated by
August 15, 2009, the $2 million was to be forfeited
and we were to issue a promissory note in the principal amount
of $4 million to OMAX.
|
We recorded a $29 million provision related to the
settlement of this patent litigation, pursuant to the terms of
the Settlement and Cross Licensing Agreement, in fiscal year
2009.
In fiscal year 2010, we terminated 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
21
with OMAX. Pursuant to the terms of the amended Merger Agreement
and the Settlement and Cross Licensing Agreement, the
$15 million held in escrow was released to OMAX. We
recorded a $6 million charge pursuant to the provisions of
the amended Merger Agreement in the first quarter of fiscal year
2010, net of a $2.8 million discount as the two
subordinated notes issued to OMAX were at a stated interest rate
of 2%, which is below our incremental borrowing rate. This
discount is being amortized as interest expense through the
maturity of the subordinated notes in August 2013.
Goodwill
Impairment Charges
Our results in fiscal year 2009 included a non-cash goodwill
impairment charge of $2.8 million, which represented the
carrying value of all of our goodwill at the time of impairment.
This charge was recognized due to a combination of factors,
including the current economic environment which had resulted in
a significant decline in the results of our operations and the
sustained period of decline in our market capitalization.
Discontinued
Operations
In fiscal year 2009, we were notified by the purchaser of our
Avure Business (Purchaser), which was reported as a
discontinued operation for the year ended April 30, 2006,
that the Swedish Tax Authority was conducting an audit which
included periods during the time that we owned the subsidiary.
Pursuant to an agreement with the Purchaser, we had made
commitments to indemnify various liabilities and claims,
including any tax matters when it owned the business. The
Swedish tax authority concluded its audit and issued a final
report in November 2009 asserting that Avure owes
19.5 million Swedish Krona in additional taxes, penalties
and fines. In April 2010, we filed an appeal to contest the
findings by the Swedish Tax Authority. While we intend to
continue contesting the findings, an equivalent of
$1.2 million was accrued in fiscal year 2010 related to the
periods during which we owned Avure. This amount was accounted
for as an adjustment to the loss on the disposal of the Avure
Business and is reported as a charge to discontinued operations
in our Consolidated Statement of Operations.
In fiscal year 2009, we shut down our CIS division, which
provided technical services to improve the productivity of
automated assembly lines and would have been reported as part of
our Advanced segment. Accordingly, we recast all periods
presented to reflect this divisions results as
discontinued operations.
22
Results
of Operations
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
2009 vs. 2008
|
|
|
Year Ended April 30,
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2010
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Sales
|
|
$
|
173,749
|
|
|
$
|
210,103
|
|
|
$
|
244,259
|
|
|
$
|
(36,354
|
)
|
|
|
(17)
|
%
|
|
$
|
(34,156
|
)
|
|
|
(14
|
)%
|
Gross Margin
|
|
|
67,767
|
|
|
|
88,328
|
|
|
|
101,710
|
|
|
|
(20,561
|
)
|
|
|
(23)
|
%
|
|
|
(13,382
|
)
|
|
|
(13
|
)%
|
Selling, General and Administrative Expenses
|
|
|
70,545
|
|
|
|
79,320
|
|
|
|
84,931
|
|
|
|
(8,775
|
)
|
|
|
(11)
|
%
|
|
|
(5,611
|
)
|
|
|
(7
|
)%
|
Provision for Patent Litigation
|
|
|
|
|
|
|
29,000
|
|
|
|
|
|
|
|
(29,000
|
)
|
|
|
NM
|
|
|
|
29,000
|
|
|
|
NM
|
|
Merger Termination Charge
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
|
|
3,219
|
|
|
|
NM
|
|
|
|
|
|
|
|
NM
|
|
OMAX Direct Transaction Fees
|
|
|
|
|
|
|
3,767
|
|
|
|
|
|
|
|
(3,767
|
)
|
|
|
NM
|
|
|
|
3,767
|
|
|
|
NM
|
|
Goodwill Impairment Charge
|
|
|
|
|
|
|
2,764
|
|
|
|
|
|
|
|
(2,764
|
)
|
|
|
NM
|
|
|
|
2,764
|
|
|
|
NM
|
|
Restructuring and Other Charges
|
|
|
1,003
|
|
|
|
3,111
|
|
|
|
|
|
|
|
(2,108
|
)
|
|
|
(68)
|
%
|
|
|
3,111
|
|
|
|
NM
|
|
Operating Income (Loss)
|
|
|
(7,000
|
)
|
|
|
(29,634
|
)
|
|
|
16,779
|
|
|
|
22,634
|
|
|
|
76
|
%
|
|
|
(46,413
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed as a % of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
39
|
%
|
|
|
42
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
(300) bpts
|
|
|
|
|
|
|
|
|
|
Provision for Patent Litigation
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
NM
|
|
Merger Termination Charge
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bpts
|
|
|
|
|
|
|
|
NM
|
|
Goodwill Impairment Charge
|
|
|
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
(100) bpts
|
|
|
|
|
|
|
|
NM
|
|
Restructuring and Other Charges
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 bpts
|
|
Operating Income (Loss)
|
|
|
(4
|
)%
|
|
|
(14
|
)%
|
|
|
7
|
%
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
NM
|
|
bpts = basis points
NM = not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
2009 vs. 2008
|
|
|
Year Ended April 30,
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2010
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Systems Sales
|
|
$
|
116,132
|
|
|
$
|
145,944
|
|
|
$
|
176,755
|
|
|
$
|
(29,812
|
)
|
|
|
(20
|
)%
|
|
$
|
(30,811
|
)
|
|
|
(17
|
)%
|
Consumable Parts Sales
|
|
|
57,617
|
|
|
|
64,159
|
|
|
|
67,504
|
|
|
|
(6,542
|
)
|
|
|
(10
|
)%
|
|
|
(3,345
|
)
|
|
|
(5
|
)%
|
Total Sales
|
|
|
173,749
|
|
|
|
210,103
|
|
|
|
244,259
|
|
|
|
(36,354
|
)
|
|
|
(17
|
)%
|
|
|
(34,156
|
)
|
|
|
(14
|
)%
|
NM = not meaningful
Fiscal
year 2010 compared to fiscal year 2009
The sales decrease of $36.4 million or 17% was primarily
due to reduced global demand for our products and services
across most geographies compared with fiscal year 2009, most
notably in North America and Europe. The continued uncertainty
in the global economy and increased credit constraints severely
limited our customers purchasing power causing delayed
capital spending and expansion plans. In particular, we
experienced significant sales volume declines in our Standard
systems and consumable parts which had a combined revenue
decline of $49 million or 45% in the first half of the year
with North America and Europe representing $39.4 million of
this decline. These declines were partially offset by improved
sales of $11.2 million in our Advanced segment during the
same period. During the second half of the year, we experienced
a modest rebound in Standard system and consumable parts sales.
Excluding the impact of foreign currency changes, consolidated
sales decreased by $38 million or 18% compared to the prior
year.
23
Our gross margin percentage decreased by 300 basis points
in fiscal year 2010 to 39% compared to 42% in fiscal year 2009.
The decrease was primarily attributable to lower fixed-cost
absorption and inefficiencies due to reduced production rates
particularly during the first half of fiscal year 2010. Further,
Advanced segment sales, which are generally at lower gross
profit margins, constituted a higher percentage of total sales.
The decrease in gross margin percentage was partially offset by
our cost reduction efforts and streamlining of our manufacturing
processes.
Selling, general and administrative expenses decreased by
$8.8 million or 11% to $70.5 million in fiscal year
2010. The decrease was primarily related to successful cost
reduction initiatives implemented in fiscal year 2010 and lower
commissions driven by the lower full-year sales volume,
partially offset by higher depreciation expense related to our
Enterprise Resource Planning (ERP) system.
During fiscal year 2010, we continued our restructuring
activities, which included reducing our global workforce and the
consolidation of our manufacturing operations. As a result, we
recorded $1.6 million in restructuring charges which were
partially offset by a $600,000 gain from the sale of our
building in Hsinchu, Taiwan. Comparative prior year charges of
$3.1 million included severance and termination charges,
inventory impairment charges and contract termination charges
associated with the shutdown of our Canadian, Korean and Taiwan
operations.
As noted in the Matters Affecting Comparability
section above, we recorded a net charge of $3.2 million
in fiscal year 2010 to record the termination of 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 with OMAX.
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 as a result of
global recession, primarily in North America and Europe with
sales down by $30.2 million or 32% in these two
geographies. 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. Excluding the impact of foreign
currency changes, consolidated sales decreased by
$33.8 million or 14% versus fiscal year 2008.
Our gross margin percentage in fiscal year 2009 was consistent
with fiscal year 2008.
Selling, general and administrative expenses decreased by
$5.6 million or 7% to $79.3 million in fiscal year
2009. The decrease was mainly as a result of successful cost
reduction initiatives undertaken in fiscal year 2009 as well as
lower performance awards expense in fiscal year 2009.
During fiscal year 2009, we adjusted our manufacturing footprint
from four factories to two, exited two unprofitable business,
and reduced our global headcount by 20%. We expensed
$3.1 million related to severance and termination charges,
inventory impairment charges and contract termination charges
associated with these actions.
As noted in the Matters Affecting Comparability
section above, we settled outstanding patent litigation with
OMAX in fiscal year 2009, removing a potential long-term risk.
We recorded a charge of $29 million related to record this
settlement. Further, in fiscal year 2009, under ASC 805,
Business Combinations, we expensed
$3.8 million of previously deferred direct transaction
costs which had been capitalized as part of the contemplated
acquisition cost of OMAX as it was deemed probable that the
contemplated merger with OMAX would not close prior to the
adoption of the new guidance on May 1, 2009.
24
Segment
Results of Operations
We report our operating results to the chief operating decision
maker based on market segments which is consistent with
managements long-term growth strategy. Our reportable
segments are Standard and Advanced. The Standard segment
includes sales and cost of sales related to our cutting surface
preparation 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 cost of sales 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.
Segment results in fiscal year 2010 were measured based on
revenue growth and gross margin. Previously, segment operating
results were measured based on revenue growth, gross margin and
operating income (loss). We have revised prior period comparable
segment presentation to reflect this change in measurement of
segment results by our chief operating decision maker.
This section provides a comparison of net sales and gross margin
for each of our reportable segments for the last three fiscal
years. For further discussion on our reportable segments, refer
to Note 17 Business Segments and Geographic
Information of the Notes to the Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data.
Standard
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
2009 vs. 2008
|
|
|
Year Ended April 30,
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2010
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Sales
|
|
$
|
137,514
|
|
|
$
|
181,132
|
|
|
$
|
216,063
|
|
|
$
|
(43,618
|
)
|
|
|
(24)
|
%
|
|
$
|
(34,931
|
)
|
|
|
(16)
|
%
|
% of total company sales
|
|
|
79
|
%
|
|
|
86
|
%
|
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
56,097
|
|
|
|
79,869
|
|
|
|
96,765
|
|
|
|
(23,772
|
)
|
|
|
(30)
|
%
|
|
|
(16,896
|
)
|
|
|
(17)
|
%
|
Gross Margin as a % of Sales
|
|
|
41
|
%
|
|
|
44
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
(300) bpts
|
|
|
|
|
|
|
|
(100) bpts
|
|
bpts = basis points
Fiscal
year 2010 compared to fiscal year 2009
Sales in our Standard segment decreased $43.6 million or
24% over the prior year. This decline was primarily due to
significant standard system sales volume decline in North
America and Europe, which were the markets affected the most by
the global recession. These two regions had a combined decline
in system sales of $29.0 million or 32% in fiscal year 2010
when compared to the prior year. Consumable parts revenue for
this segment also declined by $6.2 million or 13% in fiscal
year 2010 due to lower system utilization by our customers.
Excluding the impact of foreign currency changes, sales in the
Standard segment declined $45.3 million or 25% in fiscal
year 2010 compared to the prior year.
Gross margin in fiscal year 2010 was $56.1 million or 41%
compared to $79.9 million or 44% in the prior year.
Generally, comparison of gross margin rates in this segment will
vary period over period based on changes in our product sales
mix and prices, and levels of production volume. The
300 basis point decline in our margins in fiscal year 2010
was primarily attributable to a greater mix of lower margin
systems versus the prior year as well as lower fixed-cost
absorption and inefficiencies due to lower production rates
particularly during the first half of the current fiscal year.
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
significant standard system sales volume declines in North
America and Europe which are the markets affected the most by
the recession. These two regions had a combined decline in
system sales of $35.5 million or 28% for year ended
April 30, 2009 over the prior year. This decline was offset
by a $4.1 million or 19% 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
25
revenue for this segment also declined by $2.0 million in
fiscal 2009. Excluding the impact of foreign currency changes,
sales in the Standard segment declined $32.8 million or 15%
in fiscal year 2009 compared to fiscal 2008.
Gross margin in fiscal year 2009 was $79.9 million or 44%
compared to $96.8 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
fiscal 2008.
Advanced
Segment
In fiscal year 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 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
Year Ended April 30,
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Sales
|
|
$
|
36,235
|
|
|
$
|
28,971
|
|
|
$
|
28,196
|
|
|
$
|
7,264
|
|
|
|
25
|
%
|
|
$
|
775
|
|
|
|
3
|
%
|
% of total company sales
|
|
|
21
|
%
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
11,670
|
|
|
|
8,459
|
|
|
|
4,944
|
|
|
|
3,211
|
|
|
|
38
|
%
|
|
|
3,515
|
|
|
|
71
|
%
|
Gross Margin as a % of Sales
|
|
|
32
|
%
|
|
|
29
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
300 bpts
|
|
|
|
|
|
|
|
1100 bpts
|
|
bpts = basis points
Fiscal
year 2010 compared to fiscal year 2009
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 2010, sales in our Advanced segment increased by
$7.3 million or 25%. This increase was primarily due to the
timing of revenue recognition for some significant aerospace
contracts which were in the project design phase during the
first half of fiscal 2009. As of April 30, 2010, our
Advanced segment backlog was $21.9 million. We anticipate
the continued realization of this backlog in fiscal year 2011
and beyond. However, based on the timing of contract awards and
project design, we expect a sequential decline in Advanced
segment revenue in fiscal year 2011 as we work through some
significant aerospace contracts. Backlog includes firm orders
for which written authorizations have been accepted and revenue
has not yet been recognized.
Gross margin in fiscal year 2010, amounted to $11.7 million
or 32% compared to $8.5 million or 29% of sales in the
prior year. The improvement in gross margin as a percentage of
sales when compared to the prior year was attributable to
improved contract pricing as well as continued labor and
material efficiencies from consolidating the manufacturing for
all our advanced systems in our Jeffersonville, Indiana facility.
Fiscal
year 2009 compared to fiscal year 2008
In fiscal year 2009, sales in our Advanced segment increased by
$775,000 or 3%. This increase was primarily due to the timing of
revenue recognition for some of our aerospace contracts as well
as comparatively higher projects in fiscal year 2009.
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. The improvement in gross margin as a percentage of
sales when compared to the prior
26
year was attributable to improved contract pricing and labor
efficiencies from consolidating the manufacturing for all our
advanced systems in our Jeffersonville, Indiana facility.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
Year Ended April 30,
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Sales and Marketing
|
|
$
|
37,259
|
|
|
$
|
41,170
|
|
|
$
|
42,272
|
|
|
$
|
(3,911
|
)
|
|
|
(9
|
)%
|
|
$
|
(1,102
|
)
|
|
|
(3
|
)%
|
Research and Engineering
|
|
|
8,104
|
|
|
|
8,644
|
|
|
|
8,771
|
|
|
|
(540
|
)
|
|
|
(6
|
)%
|
|
|
(127
|
)
|
|
|
(1
|
)%
|
General and Administrative
|
|
|
25,182
|
|
|
|
29,506
|
|
|
|
33,888
|
|
|
|
(4,324
|
)
|
|
|
(15
|
)%
|
|
|
(4,382
|
)
|
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
70,545
|
|
|
|
79,320
|
|
|
|
84,931
|
|
|
|
(8,775
|
)
|
|
|
(11
|
)%
|
|
|
(5,611
|
)
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year 2010 compared to fiscal year 2009
Our consolidated operating expenses decreased by
$8.8 million or 11% when compared to fiscal year 2009. This
decrease was primarily as a result of the following:
|
|
|
|
|
the successful implementation of cost cutting initiatives
including reduction in staffing levels and temporary wage
reductions and benefit suspension for part of fiscal year 2010;
|
|
|
|
lower commission expense based on lower sales volume;
|
|
|
|
timing of investments for new product development;
|
|
|
|
lower professional fees for consulting based on the deferral of
miscellaneous projects during the current fiscal year.
|
These reductions were offset by an increase in costs related to
depreciation expense for our new ERP system which was placed
into service in October 2009.
Looking forward into fiscal 2011, we anticipate that our selling
general and administrative expenses will increase as we record a
full year of depreciation expense related to our ERP system.
Further, we have restored some of the temporary wage reductions
and suspended benefits, which will also negatively impact gross
margin and increase selling, general, and administrative
expenses as compared to fiscal year 2010.
Fiscal
year 2009 compared to fiscal year 2008
Our consolidated selling, general and administrative expenses
decreased by $5.6 million or 7% when compared to fiscal
year 2008. This decrease was primarily as a result of the
following:
|
|
|
|
|
the successful implementation of cost cutting initiatives
including reduction in staffing levels in fiscal year 2009;
|
|
|
|
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; and
|
|
|
|
lower performance award expenses in fiscal year 2009. Further,
the prior year amount also included $2.9 million of
compensation expenses to amend our former CEOs contract.
|
27
Other
(Income) Expense
Interest
Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
2009 vs. 2008
|
|
|
Year Ended April 30,
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2010
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Interest Income
|
|
$
|
252
|
|
|
$
|
494
|
|
|
$
|
780
|
|
|
$
|
(242
|
)
|
|
|
(49
|
)%
|
|
$
|
(286
|
)
|
|
|
(37
|
)%
|
Interest Expense
|
|
|
(2,374
|
)
|
|
|
(1,562
|
)
|
|
|
(419
|
)
|
|
|
(812
|
)
|
|
|
(52
|
)%
|
|
|
(1,143
|
)
|
|
|
NM
|
|
NM = not meaningful
Our interest income was $252,000, $494,000, and $780,000 for the
respective years ended April 30, 2010, 2009 and 2008. The
sequential declines in fiscal years 2010 and 2009 were mainly
the result of lower average cash balances and interest rates on
highly liquid cash and cash equivalents. 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 to us.
The major components of our interest expense are amortization of
deferred financing charges, interest charged on our outstanding
standby letters of credit and our revolving lines of credit, and
the amortization of imputed interest on our Subordinated Notes
to OMAX. The increase in interest expense over fiscal 2009 is
primarily due to imputed interest of $735,000 related to the two
Subordinated Notes issued to OMAX. Interest charged on
outstanding balances on our Senior Credit Facility as well on
outstanding standby letters of credit was comparable to fiscal
year 2009.
The increase in interest expense in fiscal year 2009 when
compared to fiscal year 2008 was attributable to 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 there was no similar expense
in fiscal year 2008; 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 as a result of the timing of milestone payments from
customers in our Advanced segment.
|
Other
Income (Expense), Net
Our Other Income (Expense), net in the Consolidated Statement of
Operations is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
Year Ended April 30,
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Realized Foreign Exchange Gains (Losses), net
|
|
$
|
(1,215
|
)
|
|
$
|
74
|
|
|
$
|
1,759
|
|
|
$
|
(1,289
|
)
|
|
|
NM
|
|
|
$
|
(1,685
|
)
|
|
|
(96
|
)%
|
Unrealized Foreign Exchange (Losses), net
|
|
|
66
|
|
|
|
(1,571
|
)
|
|
|
(2,904
|
)
|
|
|
1,637
|
|
|
|
NM
|
|
|
|
1,333
|
|
|
|
46
|
%
|
Miscellaneous Income (Expense)
|
|
|
38
|
|
|
|
883
|
|
|
|
(72
|
)
|
|
|
(845
|
)
|
|
|
(96
|
)%
|
|
|
955
|
|
|
|
NM
|
|
Premium on Repurchase of Warrants
|
|
|
|
|
|
|
|
|
|
|
(629
|
)
|
|
|
|
|
|
|
NM
|
|
|
|
629
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(1,111
|
)
|
|
|
(614
|
)
|
|
|
(1,846
|
)
|
|
|
(497
|
)
|
|
|
(81
|
)%
|
|
|
1,232
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
28
During the year ended April 30, 2010, we recorded Other
Expense, net of $1.1 million, compared to Other Expense,
net of $614,000 and $1.8 million for the respective years
ended April 30, 2009 and 2008. During fiscal year 2010, we
recorded a $1.3 million foreign currency translation
adjustment related to the liquidation of two dormant
subsidiaries as a realized foreign exchange loss. This non-cash
charge was previously recorded as an unrealized foreign exchange
loss in our currency translation account as a component of other
comprehensive income. In the fourth quarter of fiscal year 2009,
management determined that payment of certain intercompany
balances by its foreign subsidiaries would not be required in
the foreseeable future. Accordingly, we began to recognize gains
and losses related to these intercompany balances whose
settlement was not planned or anticipated in the foreseeable
future as a component of other comprehensive income which
accounts for the majority of the comparative change in its
unrealized net foreign exchange losses from fiscal year 2010 to
fiscal year 2009. The remainder of the changes in other income
and expense primarily resulted from fluctuations in realized and
unrealized foreign exchange gains and losses on revaluation of
third party and intercompany settled and unsettled balances
whose payment is anticipated in the foreseeable future.
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 Other Expense.
Income
Taxes
Our (benefit)/provision for income taxes for our continuing
operations over the last three years consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
2009 vs. 2008
|
|
|
Year Ended April 30,
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
2010
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
Current Tax Expense
|
|
$
|
1,206
|
|
|
$
|
1,470
|
|
|
$
|
4,475
|
|
|
$
|
(264
|
)
|
|
|
(18
|
)%
|
|
$
|
(3,005
|
)
|
|
|
(67
|
)%
|
Deferred Tax (Benefit) Expense
|
|
|
(4,050
|
)
|
|
|
(9,700
|
)
|
|
|
(11,092
|
)
|
|
$
|
(5,650
|
)
|
|
|
(58
|
)%
|
|
$
|
(1,392
|
)
|
|
|
(13
|
)%
|
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 operations and anticipated future
profit levels. For the fiscal year ended April 30, 2010 we
concluded that, after evaluation of all available evidence, we
anticipate generating sufficient future taxable income to
realize the benefits of our U.S. and German deferred tax
assets. As part of this evaluation we considered the impact of
the global economic downturn on our business. While our business
declined as a result of this downturn, we saw an upward trend in
our business during the second half of the current fiscal year.
Currently, the positive evidence we evaluated exceeds the
negative evidence and supports our conclusion that it is more
likely than not that these deferred assets will be realized. If,
in the future, the negative evidence were in excess of the
positive evidence our conclusion regarding the realizability of
the benefit of our deferred tax assets would change. At
April 30, 2010, the recorded amount of our deferred tax
assets was $23.9 million, net of valuation allowance on
certain foreign NOLs.
29
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. With the exception of certain of our
subsidiaries, it is our general practice and intention to
reinvest the earnings of our
non-U.S. subsidiaries
in those operations. As of April 30, 2010, we had not made
a provision for U.S. or additional foreign withholding
taxes of the excess of the amount for financial reporting over
the tax basis of investments in foreign subsidiaries with the
exception of our subsidiaries in Taiwan, Japan, and Switzerland
for which we provide deferred taxes. During fiscal year 2010, we
repatriated a total of $192,000, net of tax of $38,000 from one
foreign subsidiary, and we plan to continue repatriating
additional funds from this subsidiary in the future.
In fiscal year 2009, 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 2009. In
fiscal year 2009, we repatriated $1.6 million, net of tax
of $329,000 from two foreign subsidiaries.
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 2009. In
fiscal year 2009, we repatriated $9.8 million, net of tax
of $885,000 from two 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 and have raised funds through the sale of common stock.
Cash
Generated by Operating Activities
Cash generated by operating activities was $3.8 million for
year ended April 30, 2010, compared to a use of cash of
$6.5 million in the year ended April 30, 2009. Cash
generated by or used in operating activities is primarily
related to changes in our working capital accounts. Changes in
our working capital resulted in a net $2.8 million use of
cash for the year ended April 30, 2010 compared to
$23.3 million use of cash for the year ended April 30,
2009. The change in working capital was attributable to changes
in accounts payable due to the timing of purchases and payments
to vendors, deferred revenue and customer deposits due to the
timing of contract awards and shipments to customers, as well as
the timing of inventory purchases and collection of accounts
receivable. Further, fiscal year 2009 use of cash included a
cash payment of $8 million to OMAX to fund a portion of the
patent litigation settlement.
Available
Cash and Cash Equivalents
At April 30, 2010 we had total cash and cash equivalents of
$6.4 million. To the extent that our cash needs in the
U.S. exceed our cash reserves and availability under our
Senior Credit Facility, we may repatriate cash from certain of
our foreign subsidiaries, however, 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, 2010, anticipated revenue and 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.
In the first quarter of fiscal year 2010, 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 was
declared effective by the SEC in July 2009. In September 2009,
we
30
completed a public offering of 8,998,750 common shares at an
offering price of $2.10 per share, generating net proceeds of
approximately $17.2 million after deducting underwriting
commissions and estimated offering expenses. The proceeds from
this offering were used to reduce a significant portion of our
outstanding debt, including outstanding amounts under our Senior
Credit Facility.
Refer to Part I, Item 1A Risk Factors
for a discussion of the risks and uncertainties pertaining
to our business and industry.
Credit
Facilities and Debt
On June 10, 2009, we amended our $40 million Senior
Credit Facility Agreement which modified the maturity date of
the line to June 10, 2011 as well as certain covenants that
we are required to maintain.
In connection with our sale of common stock (refer to
Note 14 Shareholders Equity of the
Notes to the Condensed Consolidated Financial Statements
included in Item 8, Financial Statements and
Supplementary Data), we further amended our Senior Credit
Facility Agreement in August 2009, which adjusted the financial
covenants that we are required to maintain. The amendment
eliminated the requirement to maintain a minimum Consolidated
Adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) based on trailing four
quarters of $8 million. Under the amended covenants, we
were required to maintain the following ratios in each of the
fiscal year 2010 quarters:
|
|
|
|
|
|
|
Maximum Consolidated
|
|
Minimum Fixed Charge
|
|
|
Leverage Ratio(i)
|
|
Coverage Ratio(ii)
|
|
First Quarter
|
|
3.25x
|
|
2.0x
|
Second Quarter
|
|
3.35x
|
|
1.2x
|
Third Quarter
|
|
3.50x
|
|
1.2x
|
Fourth Quarter
|
|
3.35x
|
|
1.2x
|
In fiscal year 2011, we will be required to maintain the
following ratios:
|
|
|
|
|
|
|
Maximum Consolidated
|
|
Minimum Fixed Charge
|
|
|
Leverage Ratio(i)
|
|
Coverage Ratio(ii)
|
|
First Quarter
|
|
2.75x
|
|
2.0x
|
Thereafter
|
|
2.50x
|
|
2.0x
|
|
|
|
(i) |
|
Defined as the ratio of consolidated indebtedness, excluding the
subordinated notes issued to OMAX, to consolidated adjusted
EBITDA for the most recent four fiscal quarters. |
|
(ii) |
|
Defined as the ratio of consolidated adjusted EBITDA, less
income taxes and maintenance capital expenditures, during the
most recent four quarters to the sum of interest charges during
the most recent four quarters and scheduled debt repayments in
the next four quarters. |
The revised covenants also require us to meet a liquidity test
such that our consolidated indebtedness shall not exceed the
total of 65% of the book value of our accounts receivable and
40% of the book value of our inventory.
A violation of any of the covenants above would result in event
of default and accelerate the repayment of all unpaid principal
and interest and the termination of any letters of credit.
Our leverage ratio and fixed charge coverage ratio were 0.86 and
3.3 for the quarter ended April 30, 2010. Our consolidated
indebtedness did not exceed the total of 65% of the book value
of our accounts receivable and 40% of the book value of our
inventory. 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, 2010, as amended. As of April 30, 2010, the
balance outstanding under the Senior Credit Facility Agreement
amounted to $350,000 which is reflected under Notes Payable in
the Consolidated Financial Statements.
We expect to be in compliance with our covenants pursuant to the
Senior Credit Facility Agreement for at least the next twelve
months. However, in the event that there is a possibility of
default, we may institute
31
additional cost reductions; raise additional funds through
public or private debt or sale of equity; possibly seek further
amendments to our Senior Credit Facility Agreement or a
combination of these items. Refer to Part I,
Item 1A Risk Factors for discussion of
the risks and uncertainties pertaining to our business and
industry.
All of our domestic assets, including certain interests of some
foreign subsidiaries, are pledged as collateral under our Senior
Credit Facility Agreement. Interest on the Line of Credit is
based on the banks prime rate or LIBOR rate plus a
percentage spread between 3.25% and 4.5% depending on whether we
use the banks prime rate or LIBOR rate and based on our
current leverage ratio. We also pay an annual letter of credit
fee equal to 3.5% of the amount available to be drawn under each
outstanding stand-by 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, 2010, we had $35.0 million available
under our Line of Credit, net of $350,000 drawn against the Line
of Credit, bearing interest at 5.25% per annum, and
$4.6 million in outstanding letters of credit which reduce
amounts available under the Senior Credit Facility Agreement. As
of April 30, 2010, based on our maximum allowable leverage
ratio, the incremental amount we could have borrowed under our
Lines of Credit would have been approximately $14.5 million.
There were no outstanding balances under our unsecured Taiwan
credit facilities as of April 30, 2010. The total unsecured
commitment for the Taiwan credit facilities totaled
$2.8 million at April 30, 2010, bearing interest at
2.5% per annum.
As of April 30, 2009, we had an outstanding seven-year
long-term variable rate loan of $1.9 million, expiring in
2011, bearing interest at an annual rate of 3.67%. The loan was
collateralized by our building in Taiwan. The outstanding
balance on this loan was fully paid off in fiscal year 2010 with
no prepayment penalty charges.
Other
Sources of Cash
In addition to cash and cash equivalents, cash from operations
and cash available under our credit facilities, we may also
generate cash from the exercise of stock options. There were no
option exercises in each of the respective years ended
April 30, 2010, 2009 and 2008.
In September 2009, we consummated the sale of our building in
Hsinchu, Taiwan for $4.7 million and simultaneously entered
into an asset lease agreement for an insignificant portion of
the building which was treated as an operating lease. This sale
concluded our efforts to consolidate our manufacturing
activities. We generated net cash proceeds of approximately
$600,000 from the sale of the building, after paying off closing
costs, the outstanding balances on the two unsecured credit
facilities in Taiwan, and the outstanding mortgage, which
aggregated to $4.1 million as of April 30, 2009.
Uses
of Cash
Capital
Expenditures
Our capital spending plans currently provide for outlays ranging
from approximately $4 million to $6 million over the
next twelve months, primarily related to the completion of
Enterprise Resource Planning system and other information
technology related projects 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 each of the respective years ended
April 30, 2010, 2009 and 2008 amounted to
$10.0 million, $8.9 million and $6.3 million.
Capital expenditures primarily consist of investments in our
Enterprise Resource Planning system, and information technology
infrastructure and enhancements to our manufacturing facilities
to improve efficiency.
Other
Strategic Investments
In fiscal year 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.
32
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 fiscal year 2010 following a thorough
investigation of financing alternatives to complete the merger
and unsuccessful attempts to negotiate a lower purchase price.
Refer to Note 18 Provision for Patent
Litigation and Termination of OMAX Merger Agreement 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.
Repayment
of Debt and Notes Payable
Our total repayment of debt and notes payable were
$37.7 million, $3.3 million and $7.5 million for
the respective years ended April 30, 2010, 2009 and 2008.
Repurchase
of Warrants
In fiscal year 2008, 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 common stock, in our March
2005 Private Investment Public Equity transaction (the
PIPE Transaction). The Warrants were repurchased
from Third Point in connection with a 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.
Disclosures
about Contractual Obligations and Commercial
Commitments
The following table summarizes our known future payments
pursuant to certain contracts as of April 30, 2010 and the
estimated timing thereof. More detail about our contractual
obligations and commercial commitments are in Note 11
Long-term Obligations and Notes Payable and
Note 13 Commitments and Contingencies of
the Notes to the Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Fiscal Year
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating Leases
|
|
$
|
3,031
|
|
|
$
|
1,933
|
|
|
$
|
968
|
|
|
$
|
19
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
5,967
|
|
Long-term Debt, Notes Payable & Capital Leases
|
|
|
411
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
Interest on Long-term Debt and Notes Payable
|
|
|
18
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Purchase Commitments(1)
|
|
|
12,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,038
|
|
Subordinated Notes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,824
|
|
|
|
|
|
|
|
|
|
|
|
10,824
|
|
License Agreements
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Consulting Agreements
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
Liabilities related to Unrecognized Tax benefits, including
Interest and Penalties(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,232
|
|
|
|
9,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,851
|
|
|
$
|
1,953
|
|
|
$
|
968
|
|
|
$
|
10,843
|
|
|
$
|
8
|
|
|
$
|
9,240
|
|
|
$
|
38,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
(1) |
|
Purchase commitments 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. |
|
(2) |
|
Subordinated promissory notes with an aggregate face value of
$10 million issued to OMAX in fiscal year 2010. Refer to
Note 3 Restructuring Activities and Other
of the Notes to the Consolidated Financial Statements
included in Item 8, Financial Statements and
Supplementary Data for further detail. |
|
(3) |
|
We have unrecognized tax benefits of $9.2 million
associated with uncertain tax positions as of April 30,
2010. 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, 2010, the Company had no off-balance sheet
arrangements.
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.
34
Our significant accounting policies are summarized
in Note 1 The Company and
Summary of Significant Accounting Policies of the Notes to
the Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data. 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
|
|
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
|
Impairment
of Long Lived Assets
We routinely consider whether indicators of impairment of our
property and equipment assets, particularly our manufacturing
equipment, are present. Factors we consider include, but are not
limited to, significant underperformance relative to historical
or projected operating results; significant changes in the
manner of use of long-lived assets or the strategy for the
overall business; and significant negative industry or economic
trends. 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 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 is 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.
35
We concluded that there were no long-lived assets impairment
indicators in each of the fiscal years ended April 30, 2010
and 2008. We will continue to monitor circumstances and events
in future periods to determine whether asset impairment testing
is warranted based on the existence of one or more of the above
impairment indicators.
Based on a combination of factors, including the economic
environment which resulted in a significant decline in the
results of our operations and a sustained period of decline in
our market capitalization, we recorded a goodwill impairment
charge of $2.8 million in fiscal year 2009. In connection
with these triggering events for goodwill, we reviewed our
long-lived assets during fiscal year 2009 and determined that
none of our long-lived asset groups were impaired. The
determination was based on reviewing estimated undiscounted cash
flows for our asset groups.
When an undiscounted cash flow assessment is performed, as was
the case in fiscal year 2009, the evaluation of the
recoverability of long-lived assets requires us to make
significant estimates and assumptions. The principal assumptions
utilized in our fiscal year 2009 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
present at the time the impairment assessment was performed.
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, did 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.
Valuation
of Deferred Tax Assets and Uncertain Tax Positions
We account for uncertain tax positions in accordance with
ASC 740 which 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 ASC 740, the term more
likely than not means that the likelihood of an occurrence
is greater than 50%. 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 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. In evaluating our ability to recover our
deferred tax assets, we consider all available positive and
negative evidence including our past operating results, the
existence of cumulative net operating losses in the most recent
years and our forecast of future taxable income. In estimating
future taxable income, we develop assumptions including the
amount of future federal, state and foreign pre-tax operating
income, the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies.
These assumptions require significant
36
judgment about the forecasts of future taxable income and are
consistent with the plans and estimates we use to manage our
business.
As of April 30, 2010, we had approximately
$57.4 million of domestic net operating loss and
$38.8 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 2023 and fiscal year 2030. Net operating loss
carryforwards in foreign jurisdictions amount to
$44.8 million. A valuation allowance of $24.7 million
has been provided against these net operating loss carryforwards
in certain of our foreign jurisdictions as realization of the
tax benefit in those jurisdictions is uncertain. 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
ASC 740, 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
$5.5 million, for which we provide a full valuation
allowance, that expires between 2011 and 2015. 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, 2010, we have accrued our estimate of the
probable liabilities for the settlement of these claims. Refer
to Note 13 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
We sell ultrahigh-pressure waterjet systems. Sales of waterjet
systems within in the Standard segment are primarily related to
our cutting and cleaning systems using ultrahigh-pressure water
pumps and do not require significant custom configuration or
modifications. Installation of these waterjet systems by us is
not essential to the functionality of the waterjet systems but
we do 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 us is essential to the
functionality of waterjet systems sold within the Advanced
segment.
37
We recognize revenue for sales of ultrahigh-pressure waterjet
pumps, consumables, and services, and billing for freight
charges, in accordance with ASC 605, Revenue
Recognition, (ASC 605). 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 ASC 985, Software. 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.
Typical lead times can range from two to 18 months for
these systems. 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). Management reviews these estimates as work progresses
and the effect of any change in cost estimates is reflected in
the calculation of the expected margin and the percent complete.
Accounting for the profit on a contract requires (1) the
total contract value, (2) the estimated total cost to
complete which is equal to the sum of the actual incurred costs
to date on the contract and the estimated costs to complete the
scope of work, and (3) the measurement of progress towards
completion. The estimated profit or loss on a contract is equal
to the difference between the contract value and the estimated
total cost to completion. If the contract is projected to create
a loss, the entire estimated loss is recognized in the period
such loss first becomes known. Adjustments to original estimates
may be required as work progresses under a contract, as
experience is gained and as more information is obtained, even
though the scope of work required under the contract may not
change, or if contract modifications occur. For contract
modifications supported by a change in contract price, profit on
such contract modifications are only recognized upon receipt of
a signed contract amendment and only in the proportion of such
contracts progress towards completion. For modifications
not supported by a change in contract price, those additional
costs are treated as contract costs and charged to expense in
the proportion of such contracts progress towards
completion. A number of internal and external factors affect our
cost of sales estimates, including material costs, labor rates
and efficiency variances and installation and testing
requirements. While we believe that our historical experience
provides a sound basis for our estimates, actual results may
differ from managements estimates. The complexity of the
estimation process and issues related to the assumptions, risks
and uncertainties inherent with the application of the
percentage of completion method affect the amounts reported in
our financial statements.
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
38
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 evaluate our cost method investments for impairment on a
quarterly basis in accordance with ASC 325, Cost Method
Investments (ASC 325), which specifically
addresses accounting for cost method investments subsequent to
initial measurement. An impairment charge is recorded whenever a
decline in value of an investment below its carrying amount is
determined to be
other-than-temporary.
In determining if a decline is
other-than-temporary,
factors such as the length of time and extent to which the fair
value of the investment has been less than the carrying amount
of the investment, the near-term and longer-term operating and
financial prospects of the affiliate and the intent and ability
to hold the investment for a period of time sufficient to allow
for any anticipated recovery are considered.
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,
2010, we had $350,000 in interest bearing debt, all of which was
related to borrowings under our Lines of Credit. Interest on the
Line of Credit is based on the banks prime rate or LIBOR
rate plus a percentage spread between 3.25% and 4.5% depending
on whether we use the banks prime rate of LIBOR rate and
based on our current leverage ratio. Refer to
Note 11 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, 2010, a 10% change in variable interest rates
would not result in a material change in interest expense on a
rolling twelve-month basis. At April 30, 2010, 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 59% of consolidated revenue. Based on
our results for the year ended April 30, 2010 for our
foreign subsidiaries, a hypothetical 10% favorable and
unfavorable change in foreign currency exchange rates would have
affected our annualized foreign-currency-denominated operating
results by approximately $3.0 million. Our consolidated
financial position and cash flows could be similarly impacted.
We may from time to time selectively utilize forward exchange
rate contracts which we may or may not designate 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).
39
|
|
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
|
|
|
|
|
41
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
Financial Statement Schedule
|
|
|
|
|
|
|
|
79
|
|
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders 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, 2010 and 2009, and the
related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended
April 30, 2010. Our audits also included the financial
statement schedule listed in the Index at Item 15. We also
have audited the Companys internal control over financial
reporting as of April 30, 2010, 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 schedule, 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 schedule 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.
41
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Flow International Corporation and subsidiaries as
of April 30, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended April 30, 2010, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents 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, 2010, 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
July 1, 2010
42
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
6,367
|
|
|
$
|
10,117
|
|
Restricted Cash
|
|
|
639
|
|
|
|
220
|
|
Receivables, net
|
|
|
35,749
|
|
|
|
32,103
|
|
Inventories, net
|
|
|
22,503
|
|
|
|
21,480
|
|
Deferred Income Taxes, net
|
|
|
2,486
|
|
|
|
8,686
|
|
Deferred Acquisition Costs
|
|
|
|
|
|
|
17,093
|
|
Other Current Assets
|
|
|
6,351
|
|
|
|
5,544
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
74,095
|
|
|
|
95,243
|
|
Property and Equipment, net
|
|
|
21,769
|
|
|
|
22,983
|
|
Intangible Assets, net
|
|
|
4,504
|
|
|
|
4,456
|
|
Deferred Income Taxes, net
|
|
|
26,330
|
|
|
|
17,480
|
|
Other Long-Term Assets
|
|
|
4,511
|
|
|
|
4,798
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131,209
|
|
|
$
|
144,960
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Notes Payable (Note 11)
|
|
$
|
350
|
|
|
$
|
15,226
|
|
Current Portion of Long-Term Obligations
|
|
|
61
|
|
|
|
1,367
|
|
Accounts Payable
|
|
|
15,306
|
|
|
|
10,215
|
|
Accrued Payroll and Related Liabilities
|
|
|
5,938
|
|
|
|
5,406
|
|
Taxes Payable and Other Accrued Taxes
|
|
|
1,329
|
|
|
|
2,276
|
|
Deferred Income Taxes
|
|
|
1,086
|
|
|
|
651
|
|
Deferred Revenue
|
|
|
4,049
|
|
|
|
4,649
|
|
Customer Deposits
|
|
|
6,097
|
|
|
|
3,322
|
|
Reserve for Patent Litigation
|
|
|
|
|
|
|
15,000
|
|
Other Accrued Liabilities
|
|
|
7,966
|
|
|
|
9,208
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
42,182
|
|
|
|
67,320
|
|
Long-Term Obligations, net
|
|
|
18
|
|
|
|
1,937
|
|
Deferred Income Taxes
|
|
|
3,856
|
|
|
|
5,498
|
|
Subordinated Notes (Note 18)
|
|
|
7,954
|
|
|
|
6,000
|
|
Other Long-Term Liabilities
|
|
|
1,575
|
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,585
|
|
|
|
82,249
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Series A 8% Convertible Preferred Stock
$.01 par value, 1,000,000 shares authorized, none
issued
|
|
|
|
|
|
|
|
|
Common Stock $.01 par value,
84,000,000 shares authorized, 46,926,661 and
37,704,684 shares issued and outstanding at April 30,
2010 and 2009, respectively
|
|
|
465
|
|
|
|
372
|
|
Capital in Excess of Par
|
|
|
159,605
|
|
|
|
140,634
|
|
Accumulated Deficit
|
|
|
(79,887
|
)
|
|
|
(71,403
|
)
|
Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Defined Benefit Plan Obligation, net of income tax of $31 and $37
|
|
|
9
|
|
|
|
(80
|
)
|
Cumulative Translation Adjustment, net of income tax of $698 and
$508
|
|
|
(4,568
|
)
|
|
|
(6,812
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
75,624
|
|
|
|
62,711
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131,209
|
|
|
$
|
144,960
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Sales
|
|
$
|
173,749
|
|
|
$
|
210,103
|
|
|
$
|
244,259
|
|
Cost of Sales
|
|
|
105,982
|
|
|
|
121,775
|
|
|
|
142,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
67,767
|
|
|
|
88,328
|
|
|
|
101,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
37,259
|
|
|
|
41,170
|
|
|
|
42,272
|
|
Research and Engineering
|
|
|
8,104
|
|
|
|
8,644
|
|
|
|
8,771
|
|
General and Administrative
|
|
|
25,182
|
|
|
|
29,506
|
|
|
|
33,888
|
|
Provision for Patent Litigation
|
|
|
|
|
|
|
29,000
|
|
|
|
|
|
Goodwill Impairment
|
|
|
|
|
|
|
2,764
|
|
|
|
|
|
Restructuring and Other Operating Charges, net
|
|
|
4,222
|
|
|
|
6,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,767
|
|
|
|
117,962
|
|
|
|
84,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(7,000
|
)
|
|
|
(29,634
|
)
|
|
|
16,779
|
|
Interest Income
|
|
|
252
|
|
|
|
494
|
|
|
|
780
|
|
Interest Expense
|
|
|
(2,374
|
)
|
|
|
(1,562
|
)
|
|
|
(419
|
)
|
Other (Expense), net
|
|
|
(1,111
|
)
|
|
|
(614
|
)
|
|
|
(1,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Benefit for Income Taxes
|
|
|
(10,233
|
)
|
|
|
(31,316
|
)
|
|
|
15,294
|
|
Benefit for Income Taxes
|
|
|
2,844
|
|
|
|
8,230
|
|
|
|
6,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(7,389
|
)
|
|
|
(23,086
|
)
|
|
|
21,911
|
|
Income (Loss) from Operations of Discontinued Operations, Net of
Income Tax of $0, $0, and $230
|
|
|
(1,095
|
)
|
|
|
(733
|
)
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(8,484
|
)
|
|
$
|
(23,819
|
)
|
|
$
|
22,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
$
|
(0.17
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.59
|
|
Income (Loss) from Discontinued Operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
$
|
(0.17
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.58
|
|
Income (Loss) from Discontinued Operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(8,484
|
)
|
|
$
|
(23,819
|
)
|
|
$
|
22,354
|
|
Adjustments to reconcile Net Income (Loss) to Cash Provided by
(Used In) Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
5,725
|
|
|
|
4,343
|
|
|
|
3,974
|
|
Deferred Income Taxes
|
|
|
(4,131
|
)
|
|
|
(9,264
|
)
|
|
|
(10,931
|
)
|
Provision for Slow Moving and Obsolete Inventory
|
|
|
733
|
|
|
|
675
|
|
|
|
1,307
|
|
Bad Debt Expense
|
|
|
813
|
|
|
|
1,225
|
|
|
|
1,805
|
|
Warranty Expense
|
|
|
3,367
|
|
|
|
3,415
|
|
|
|
3,589
|
|
Incentive Stock Compensation Expense
|
|
|
1,911
|
|
|
|
1,724
|
|
|
|
695
|
|
Unrealized Foreign Exchange Currency Losses (Gains)
|
|
|
(66
|
)
|
|
|
1,571
|
|
|
|
2,904
|
|
Provision for Patent Litigation
|
|
|
|
|
|
|
29,000
|
|
|
|
|
|
OMAX Termination Charge
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
Goodwill Impairment
|
|
|
|
|
|
|
2,764
|
|
|
|
|
|
Indemnification Charge
|
|
|
1,175
|
|
|
|
|
|
|
|
|
|
Interest Accretion on Subordinated Notes
|
|
|
735
|
|
|
|
|
|
|
|
|
|
Realized Foreign Exchange Loss on Liquidation of Dormant Foreign
Entities
|
|
|
1,277
|
|
|
|
|
|
|
|
|
|
Write-off and Amortization of Debt Issuance Costs
|
|
|
253
|
|
|
|
879
|
|
|
|
|
|
Write-off of Previously Deferred Direct Transaction Fees
|
|
|
|
|
|
|
3,767
|
|
|
|
|
|
Excess Tax Benefits from Exercise of Stock Options
|
|
|
|
|
|
|
|
|
|
|
(291
|
)
|
Premium on Warrant Repurchase
|
|
|
|
|
|
|
|
|
|
|
629
|
|
Other
|
|
|
112
|
|
|
|
539
|
|
|
|
738
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(3,547
|
)
|
|
|
(1,392
|
)
|
|
|
(6,121
|
)
|
Inventories
|
|
|
(1,702
|
)
|
|
|
5,044
|
|
|
|
(2,894
|
)
|
Other Operating Assets
|
|
|
(1,713
|
)
|
|
|
(316
|
)
|
|
|
2,066
|
|
Accounts Payable
|
|
|
6,816
|
|
|
|
(10,494
|
)
|
|
|
790
|
|
Accrued Payroll and Related Liabilities
|
|
|
389
|
|
|
|
(2,655
|
)
|
|
|
2,027
|
|
Deferred Revenue
|
|
|
(628
|
)
|
|
|
(107
|
)
|
|
|
(389
|
)
|
Customer Deposits
|
|
|
2,644
|
|
|
|
(784
|
)
|
|
|
(1,671
|
)
|
Release of Funds from Escrow
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
Payment for OMAX Termination
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
Payment for Patent Litigation Settlement
|
|
|
(15,000
|
)
|
|
|
(8,000
|
)
|
|
|
|
|
Other Operating Liabilities
|
|
|
(5,071
|
)
|
|
|
(4,579
|
)
|
|
|
(6,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in) Operating Activities
|
|
|
3,827
|
|
|
|
(6,464
|
)
|
|
|
13,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for Property and Equipment
|
|
|
(9,196
|
)
|
|
|
(8,150
|
)
|
|
|
(5,748
|
)
|
Expenditures for Intangible Assets
|
|
|
(773
|
)
|
|
|
(782
|
)
|
|
|
(555
|
)
|
Proceeds from Sale of Short-term Investments
|
|
|
|
|
|
|
|
|
|
|
773
|
|
Proceeds from Sale of Property and Equipment
|
|
|
4,685
|
|
|
|
195
|
|
|
|
254
|
|
Payments for Contemplated OMAX Acquisition
|
|
|
|
|
|
|
(13,336
|
)
|
|
|
(7,430
|
)
|
Payments for Dardi Investment
|
|
|
|
|
|
|
(3,604
|
)
|
|
|
(78
|
)
|
Restricted Cash
|
|
|
(403
|
)
|
|
|
(78
|
)
|
|
|
(142
|
)
|
Other
|
|
|
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used in Investing Activities
|
|
|
(5,687
|
)
|
|
|
(25,538
|
)
|
|
|
(12,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on Senior Credit Agreement
|
|
|
(32,091
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
Borrowings on Senior Credit Agreement
|
|
|
19,441
|
|
|
|
15,000
|
|
|
|
|
|
Repayments Under Notes Payable
|
|
|
|
|
|
|
|
|
|
|
(6,616
|
)
|
Borrowings Under Notes Payable
|
|
|
|
|
|
|
1,264
|
|
|
|
1,106
|
|
Repayments Under Other Financing Arrangements
|
|
|
(1,398
|
)
|
|
|
(487
|
)
|
|
|
(101
|
)
|
Borrowings Under Other Financing Arrangements
|
|
|
|
|
|
|
1,497
|
|
|
|
319
|
|
Payments of Long-Term Obligations
|
|
|
(4,214
|
)
|
|
|
(781
|
)
|
|
|
(785
|
)
|
Proceeds from Exercise of Stock Options
|
|
|
|
|
|
|
|
|
|
|
1,198
|
|
Excess Tax Benefits from Exercise of Stock Options
|
|
|
|
|
|
|
|
|
|
|
291
|
|
Proceeds from Issuance of Common Stock, net of Issuance Costs
|
|
|
17,199
|
|
|
|
|
|
|
|
|
|
Payments for Debt Issuance Costs
|
|
|
(607
|
)
|
|
|
(1,364
|
)
|
|
|
|
|
Payments for Warrants Repurchase
|
|
|
|
|
|
|
|
|
|
|
(3,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in) Financing Activities
|
|
|
(1,670
|
)
|
|
|
13,129
|
|
|
|
(7,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Changes in Exchange Rates
|
|
|
(220
|
)
|
|
|
(109
|
)
|
|
|
(2,636
|
)
|
Increase (Decrease) in Cash And Cash Equivalents
|
|
|
(3,750
|
)
|
|
|
(18,982
|
)
|
|
|
(9,189
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
10,117
|
|
|
|
29,099
|
|
|
|
38,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
6,367
|
|
|
$
|
10,117
|
|
|
$
|
29,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,142
|
|
|
$
|
1,419
|
|
|
$
|
341
|
|
Income Taxes
|
|
|
1,160
|
|
|
|
2,557
|
|
|
|
6,961
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable incurred to acquire Property and Equipment, and
Intangible Assets
|
|
|
516
|
|
|
|
2,352
|
|
|
|
745
|
|
Accrued Liabilities incurred for Pending Acquisition
|
|
|
|
|
|
|
|
|
|
|
445
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
FLOW
INTERNATIONAL CORPORATION
AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Par
|
|
|
Excess
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
of Par
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,484
|
)
|
|
|
|
|
|
|
(8,484
|
)
|
Defined Benefit Pension Plan Adjustment, net of Income Tax of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
89
|
|
Realization of Foreign Currency Translation Losses from the
Liquidation of Dormant Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,277
|
|
|
|
1,277
|
|
Cumulative Translation Adjustment, net of Income Tax of $190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
967
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Common stock at $2.10 per share, net of Stock Issuance
Costs of $1.7 million
|
|
|
8,999
|
|
|
|
90
|
|
|
|
17,109
|
|
|
|
|
|
|
|
|
|
|
|
17,199
|
|
Stock Compensation
|
|
|
223
|
|
|
|
3
|
|
|
|
1,862
|
|
|
|
|
|
|
|
|
|
|
|
1,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2010
|
|
|
46,927
|
|
|
$
|
465
|
|
|
$
|
159,605
|
|
|
$
|
(79,887
|
)
|
|
$
|
(4,559
|
)
|
|
$
|
75,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
|
|
Note 1
|
The
Company and Summary of Significant Accounting
Policies:
|
Reporting
Policies
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.
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 94,000 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 surface preparation 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.
The Company reports its operating results to the chief operating
decision maker based on market segments which is consistent with
managements long-term growth strategy. The Companys
reportable segments are Standard and Advanced. The Standard
segment includes sales and cost of sales 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 cost of sales 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 17 Business Segments and
Geographic Information.
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).
Net realized and unrealized foreign exchange gains and (losses)
included in Other Income (Loss) for each of the respective years
ended April 30, 2010, 2009 and 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Net Realized Foreign Exchange Gains (Losses)
|
|
$
|
(1,215
|
)
|
|
$
|
74
|
|
|
$
|
1,759
|
|
Net Unrealized Foreign Exchange Gains (Losses)
|
|
|
66
|
|
|
|
(1,571
|
)
|
|
|
(2,904
|
)
|
47
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 its reporting periods and at the date of its
financial statements. These estimates and assumptions affect the
Companys:
|
|
|
|
|
reported amounts of assets, liabilities and equity;
|
|
|
|
disclosure of contingent assets and liabilities at the date of
the financial statements; and
|
|
|
|
reported amounts of revenues and expenses during the reporting
periods.
|
Actual results could differ from those estimates and assumptions.
Accounting
Changes Implemented in Fiscal Year 2010
Accounting Standards Codification In June
2009, the Financial Accounting Standards Board
(FASB) issued ASC 105, formerly
SFAS No. 168, The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162. This Statement established the FASB
Accounting Standards Codification (ASC), along with
rules and interpretive releases of the U.S. Securities and
Exchange Commission under authority of federal securities laws,
as the source of authoritative generally accepted accounting
principles (GAAP) in the United States. The
Statement was effective for interim and annual reporting periods
ending after September 15, 2009, which was October 31,
2009 for the Company. The Company conformed to the FASB
Accounting Standards Codification when referring to GAAP in the
Quarterly Report on
Form 10-Q
for the interim period ended October 31, 2009. As the
Codification was not intended to change or alter existing GAAP,
it did not have any impact on the Companys consolidated
financial statements.
Business Combinations In December 2007, the
FASB issued new guidance on business combinations which
significantly changed the accounting for business combinations
in a number of areas including the treatment of contingent
consideration, preacquisition contingencies, transaction costs,
in-process research and development and restructuring costs. In
addition, under the new guidance, changes in an acquired
entitys deferred tax assets and uncertain tax positions
after the measurement period impact income tax expense. The
guidance was effective for fiscal years beginning after
December 15, 2008. We adopted the guidance on May 1,
2009, which changed our accounting treatment for business
combinations on a prospective basis. Under this standard, 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) 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 the new guidance on
May 1, 2009. This amount was included in the Restructuring
and Other line item on the Consolidated Statement of Operations
for the year ended April 30, 2009.
Noncontrolling Interests In December 2007,
the FASB issued new guidance on noncontrolling interests in
consolidated financial statements. The guidance changed the
accounting and reporting for minority interests, which must be
recharacterized as noncontrolling interests and classified as a
component of shareholders equity. This consolidation
method significantly changed the treatment of transactions with
minority interest holders. The provisions of this standard were
to be applied prospectively with the exception of the
presentation and disclosure, which are to be applied for all
prior periods presented in the financial statements. The
adoption of this standard had no impact on the Companys
consolidated financial statements.
Fair Value and
Other-Than-Temporary
Impairments In September 2006, the FASB issued
new guidance which defined fair value, established a framework
for measuring fair value in accordance with GAAP and expanded
disclosures about fair value measurements. The Company adopted
this guidance on May 1, 2008 for all financial assets and
liabilities and on May 1, 2009 for all nonfinancial assets
and liabilities.
48
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2009, the FASB issued new guidance intended to provide
additional application guidance and require enhanced disclosures
regarding fair value measurements and impairments of securities.
This new guidance relates to determining fair value when the
volume and level of activity for the asset or liability have
significantly decreased, identifying transactions that are not
orderly and provides additional guidelines for estimating fair
value in accordance with pre-existing guidance on fair value
measurements. The new guidance on recognition and presentation
of
other-than-temporary
impairments provides additional guidance related to the
disclosure of impairment losses on securities and the treatment
of impairment losses on debt securities, but does not amend
existing guidance related to
other-than-temporary
impairments of equity securities. Lastly, new guidance on
interim disclosures about the fair value of financial
instruments increases the frequency of fair value disclosures.
The new guidance was effective for fiscal years and interim
periods ended after June 15, 2009. The Company adopted the
new guidance in the first quarter of fiscal year 2010, and has
included the additional required disclosures about the fair
value of financial instruments and valuation techniques in
Note 12 Fair Value of Financial
Instruments.
Subsequent Events In May 2009, the FASB
issued new guidance on the treatment of subsequent events which
was intended to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. Specifically, this new guidance sets forth the period
after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that
occurred for potential recognition or disclosure in the
financial statements, the circumstances under which an entity
should recognize events or transactions that occurred after the
balance sheet date in its financial statements, and the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This
new guidance was effective for fiscal years and interim periods
ended after June 15, 2009, and was to be applied
prospectively. The Company adopted and applied the provisions of
the new guidance in the second quarter of fiscal year 2010.
In February 2010, subsequent to the adoption of the new guidance
discussed above, the FASB issued updated guidance on subsequent
events, amending the May 2009 guidance. This updated guidance
revised various terms and definitions within the guidance and
requires the Company, as an SEC filer, to evaluate
subsequent events through the date the financial statements are
issued, rather than through the date the financial statements
are available to be issued. Furthermore, the Company is no
longer required to disclose the date through which subsequent
events have been evaluated. The updated guidance was effective
immediately upon issuance. In preparing the accompanying
consolidated financial statements, the Company evaluated the
period from May 1, 2010 through the date the financial
statements were issued for material subsequent events requiring
recognition or disclosure. No such events were identified for
this period.
Accounting
for Certain Key Items
This section provides information about how the Company accounts
for certain key items related to:
|
|
|
|
|
capital investments;
|
|
|
|
financing its business; and
|
|
|
|
operations
|
Policies
related to Capital Investments
Valuation
of Cost Method Investments
The Company evaluates its cost method investments for impairment
on a quarterly basis in accordance with ASC 325, Cost
Method Investments (ASC 325), which specifically
addresses accounting for cost method investments subsequent to
initial measurement. An impairment charge is recorded whenever a
decline in value of an investment below its carrying amount is
determined to be
other-than-temporary.
In determining
49
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
if a decline is
other-than-temporary,
factors such as the length of time and extent to which the fair
value of the investment has been less than the carrying amount
of the investment, the near-term and longer-term operating and
financial prospects of the affiliate and the intent and ability
to hold the investment for a period of time sufficient to allow
for any anticipated recovery are considered.
Intangible
Assets
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 20 years.
Impairment
of Long-Lived Assets
The Company routinely considers whether indicators of impairment
of its property and equipment assets, particularly its
manufacturing equipment, are present. Factors considered
include, but are not limited to, significant underperformance
relative to historical or projected operating results;
significant changes in the manner of use of long-lived assets or
the strategy for the overall business; and significant negative
industry or economic trends. 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 is 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.
The Company concluded that there were no long-lived impairment
indicators in each of the fiscal years ended April 30, 2010
and 2008 following an analysis of operating results and
consideration of other significant events or changes in the
business environment. The Company will continue to monitor
circumstances and events in future periods to determine whether
asset impairment testing is warranted based on the existence of
one or more of the above impairment indicators.
Based on a combination of factors, including the economic
environment which resulted in a significant decline in the
results of the Companys operations and a sustained period
of decline in its market capitalization, the Company recorded a
goodwill impairment charge of $2.8 million in fiscal year
2009. In connection with these triggering events for goodwill,
the Company reviewed its long-lived assets during fiscal year
2009 and determined that none of its long-lived asset groups
were impaired. The determination was based on reviewing
estimated undiscounted cash flows for the Companys asset
groups.
When an undiscounted cash flow assessment is performed, as was
the case in fiscal year 2009, the evaluation of the
recoverability of long-lived assets requires the Company to make
significant estimates and assumptions. The principal assumptions
utilized in the Companys fiscal year 2009 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 present at the time the
impairment assessment was performed. Revenue growth rate and
operating profit assumptions are
50
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consistent with those utilized in the Companys operating
plan and long-term financial planning process. Methodologies
used for valuing the Companys 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, did not result in a
shortfall of the sum of the estimated undiscounted cash flows
against carrying value for any of its asset groups.
Internally
Developed Software
The Company accounts for internally developed software,
primarily its Enterprise Resource Planning (ERP)
system, based on three distinct stages. The first stage, the
preliminary project stage, includes the conceptual formulation,
design and testing of alternatives. All costs incurred in this
first stage are expensed as incurred. During the second phase,
all costs incurred until the software is substantially complete
and ready for use, including all necessary testing, are
capitalized. Capitalized costs during this phase include
external direct costs of materials and services consumed in
developing and obtaining internal-use computer software and the
payroll and payroll-related costs for employees who are directly
associated with and who devote time to developing the
internal-use computer software. The final stage, the
implementation stage, includes the activities associated with
placing a software project into service. All costs related to
this implementation stage are expensed as incurred. Capitalized
costs are amortized when the software is ready for its intended
use on a straight-line basis over the estimated life of the
software.
Policies
related to Financing the Companys 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 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 typically not been designated as hedges. 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, 2010, 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 12 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 and are primarily related to
cash which collateralizes commercial letters of credit.
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
51
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, when persuasive evidence of an arrangement
exists, title and risk of loss have passed to the customer, the
price is fixed or determinable, and collectability 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.
The Company recognizes 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 the Companys waterjet systems within
its 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.
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). Management reviews these estimates as work progresses
and the effect of any change in cost estimates is reflected in
the calculation of the expected margin and the percent complete.
If the contract is projected to create a loss, the entire
estimated loss is recognized in the period such loss first
becomes known. Accounting for the profit on a contract requires
(1) the total contract value, (2) the estimated total
cost to complete which is equal to the sum of the actual
incurred costs to date on the contract and the estimated costs
to complete the scope of work, and (3) the measurement of
progress towards completion. The estimated profit or loss on a
contract is equal to the difference between the contract value
and the estimated total cost to completion. If the contract is
projected to create a loss, the entire estimated loss is
recognized in the period such loss first becomes known.
Adjustments to original estimates may be required as work
progresses under a contract, as experience is gained and as more
information is obtained, even though the scope of work required
under the contract may not change, or if contract modifications
occur. For contract modifications supported by a change in
contract price, profit on such contract modifications are only
recognized upon receipt of a signed contract amendment and only
in the proportion of such contracts progress towards
completion. For modifications not supported by a change in
contract price, those additional costs are treated as contract
costs and charged to expense in the proportion of such
contracts progress towards completion. A number of
internal and external factors affect the Companys cost of
sales estimates, including material costs, labor rates and
efficiency variances and installation and testing requirements.
While management believes that the Companys historical
experience provides a sound basis for its estimates, actual
results may differ from managements estimates.
52
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shipping revenues and expenses are recorded in revenue and cost
of goods sold, respectively.
Cost of
Sales
Cost of sales are generally recognized when products are shipped
or services are delivered. In the case of waterjet systems, cost
of sales for delivered systems are 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, including estimated future warranty obligations. 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 the
Companys distribution network.
Advertising
Expense
The Company recognizes advertising expense as incurred including
costs to promote its brands. For the respective years ended
April 30, 2010, 2009 and 2008, the Companys
advertising expense was $538,000, $1.2 million and
$1.2 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 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 not 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 increase the provision
for income taxes.
The Companys income tax returns, like those of most
companies, are periodically audited by U.S. federal, state
and local and foreign tax authorities. These audits include
questions regarding our tax filing 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. In
evaluating the tax benefits associated with the Companys
various tax filing positions, the Company records a tax benefit
for uncertain tax positions using the highest cumulative tax
benefit that is more likely than not to be realized. A number of
years may elapse before a particular matter, for which a
liability has been established, is audited and effectively
settled. The Company adjusts its liability for unrecognized tax
benefits in the period in which it determines the issue is
effectively settled with the tax authorities, the statute of
limitations expires for the relevant taxing authority to examine
the tax position or when more information becomes available.
53
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 the Companys
customer base across many different geographic regions and
performing creditworthiness analyses on such customers.
The Companys largest customer in the Advanced segment
accounted for approximately 11% of consolidated sales in fiscal
year 2010. No single customer accounted for 10% or more of sales
during any of the respective years ended April 30, 2009 and
2008.
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 13 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.
The Companys annual Plan Cost was approximately
$2.9 million in each of the respective years ending
April 30, 2010, 2009 and 2008, and the liability, including
IBNR, recorded in Accrued Payroll and Related Liabilities, was
$325,000 and $314,000 as of April 30, 2010 and 2009,
respectively.
54
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
$8.1 million, $8.6 million and $8.3 million for
fiscal year 2010, 2009 and 2008.
Stock
Based Compensation
The Company measures 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. Refer to Note 15
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 insurance underwriters have totaled
$1.6 million, $1.8 million and $1.9 million for
the respective years ended April 2010, 2009 and 2008. These
amounts included commissions of $197,000, $346,000 and $137,000,
in each of the respective fiscal years.
As of April 30, 2010, the Company owed $278,000 to the
related entity which is included in Other Accrued Liabilities
balance on the Consolidated Financial Statements.
|
|
Note 2
|
Recently
Issued Accounting Pronouncements
|
In September 2009, the FASB ratified the consensuses reached by
the EITF regarding multiple-deliverable revenue arrangements The
new guidance:
|
|
|
|
|
provides principles and application guidance on whether a
revenue arrangement contains multiple deliverables, how the
arrangement should be separated, and how the arrangement
consideration should be allocated;
|
|
|
|
requires an entity to allocate revenue in a multiple-deliverable
arrangement using estimated selling prices of the deliverables
if a vendor does not have vendor-specific objective evidence or
third-party evidence of selling price;
|
|
|
|
eliminates the use of the residual method and, instead, requires
an entity to allocate revenue using the relative selling price
method; and
|
|
|
|
expands disclosure requirements with respect to
multiple-deliverable revenue arrangements.
|
This new guidance applies to multiple-deliverable revenue
arrangements that contain both software and hardware elements,
focusing on determining which revenue arrangements are within
the scope of software revenue guidance. This new guidance
removes tangible products from the scope of the software revenue
55
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product
are within the scope of the software revenue guidance. The
accounting guidance should be applied on a prospective basis for
revenue arrangements entered into or materially modified in
fiscal year 2012. Alternatively, an entity can elect to adopt
the provisions of these issues on a retrospective basis. The
Company is currently assessing the potential impact that the
application of the new revenue guidance may have on its
consolidated financial statements and disclosures.
|
|
Note 3
|
Restructuring
Activities and Other
|
During fiscal year 2009, the Company implemented initiatives to
improve its cost structure, better utilize overall capacity and
improve general operating efficiencies. Based on the continued
deterioration in general economic conditions, the Company
expanded its restructuring activities in fiscal year 2010 in
order to improve performance and better position the Company for
current market conditions and longer-term growth. During the
respective years ended April 30, 2010 and 2009, the Company
recorded $1.0 million and $6.8 million related to
these restructuring activities. The restructuring charges
recorded in fiscal year 2010 were net of a $600,000 credit
related to the gain recognized on the sale of the Companys
building in Hsinchu, Taiwan discussed in Note 8
Property and Equipment. There are no further planned
restructuring activities as of April 30, 2010.
The Company recorded a $6 million charge pursuant to the
provisions of an amended Merger Agreement with OMAX, net of a
$2.8 million discount on two subordinated notes issued to
OMAX in fiscal year 2010. Refer to further detail in
Note 18 Provision for Patent Litigation and
Termination of OMAX Merger Agreement.
In fiscal year 2009, under ASC 805, Business
Combinations, 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
as it was deemed probable that the contemplated merger with OMAX
would not close prior to the adoption of ASC 805 on
May 1, 2009.
The following table summarizes the Companys restructuring
and other operating charges, net:
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Severance and termination benefits
|
|
$
|
1,604
|
|
|
$
|
2,339
|
|
Lease termination costs and long-lived assets impairment charge
|
|
|
|
|
|
|
187
|
|
Inventory write-down
|
|
|
|
|
|
|
144
|
|
Gain on sale of building
|
|
|
(601
|
)
|
|
|
|
|
Merger termination charge
|
|
|
3,219
|
|
|
|
|
|
OMAX direct transaction fees
|
|
|
|
|
|
|
3,767
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,222
|
|
|
$
|
6,437
|
|
|
|
|
|
|
|
|
|
|
56
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys restructuring
activity:
|
|
|
|
|
|
|
Consolidated
|
|
|
Balance, May 1, 2008
|
|
$
|
|
|
Restructuring Charges
|
|
|
2,670
|
|
Cash Payments
|
|
|
(2,344
|
)
|
Other
|
|
|
(144
|
)
|
|
|
|
|
|
Balance, April 30, 2009
|
|
$
|
182
|
|
Restructuring Charges
|
|
|
1,604
|
|
Cash Payments
|
|
|
(1,631
|
)
|
|
|
|
|
|
Balance, April 30, 2010
|
|
$
|
155
|
|
|
|
|
|
|
|
|
Note 4
|
Discontinued
Operations
|
The Company recorded a charge of $1.2 million for the year
ended April 30, 2010 as an adjustment to the loss on the
disposal of the Avure Business, which was reported as
discontinued operations for the year ended April 30, 2006.
Refer to further discussion on this charge in Note 13
Commitments and Contingencies.
In fiscal year 2009, the Company shut down its CIS Technical
Solutions division (CIS division), which provided
technical services to improve the productivity of automated
assembly lines and would have been reported as part of the
Advanced segment. As a result of this action, the Company
recognized $789,000 in total closure costs during fiscal 2009,
which was 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. All of the severance costs
for the CIS division were paid out as of April 30, 2010.
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, 2010 and 2009
and the Consolidated Statements of Cash Flows for the respective
years ended April 30, 2010, 2009 and 2008 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 and 2008 is
set forth below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Sales
|
|
$
|
1,605
|
|
|
$
|
4,107
|
|
Income (Loss) before provision for income taxes
|
|
|
(733
|
)
|
|
|
673
|
|
(Provision) for income taxes
|
|
|
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations of discontinued operations
|
|
$
|
(733
|
)
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
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
57
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
$
|
(7,389
|
)
|
|
$
|
(23,086
|
)
|
|
$
|
21,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income (loss) per share
weighted average shares
|
|
|
43,567
|
|
|
|
37,627
|
|
|
|
37,421
|
|
Dilutive potential common shares from employee stock options
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Dilutive potential common shares from stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) per share
weighted average shares and assumed conversions
|
|
|
43,567
|
|
|
|
37,627
|
|
|
|
37,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share from continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.59
|
|
Diluted income (loss) per share from continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.58
|
|
There were 888,780, 1,201,365, and 617,760 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, 2010,
2009 and 2008 as their effect would be anti-dilutive.
Receivables, net as of April 30, 2010 and 2009 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Trade Accounts Receivable
|
|
$
|
23,717
|
|
|
$
|
25,304
|
|
Unbilled Revenues
|
|
|
13,184
|
|
|
|
9,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,901
|
|
|
|
34,337
|
|
Less Allowance for Doubtful Accounts
|
|
|
(1,152
|
)
|
|
|
(2,234
|
)
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
35,749
|
|
|
$
|
32,103
|
|
|
|
|
|
|
|
|
|
|
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.
58
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories as of April 30, 2010 and 2009 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw Materials and Parts
|
|
$
|
11,895
|
|
|
$
|
11,806
|
|
Work in Process
|
|
|
2,188
|
|
|
|
1,762
|
|
Finished Goods
|
|
|
8,420
|
|
|
|
7,912
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
22,503
|
|
|
$
|
21,480
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
In fiscal year 2010, the Company sold its building in Hsinchu,
Taiwan, receiving $4.7 million from the proceeds of the
sale, and simultaneously entered into a lease agreement for an
insignificant portion of the building for a one-year period,
which has been treated as an operating lease. This sale
concluded the Companys overall efforts to consolidate its
manufacturing activities. The Company recorded a gain of
approximately $600,000 from the sale of the building, after
paying closing costs and other adjustments. The gain was
recorded in Restructuring and Other Operating Charges in the
Companys Condensed Consolidated Statement of Operations in
fiscal year 2010.
The carrying value of the Companys Property and Equipment
and estimated service lives as of April 30, 2010 and 2009
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
Range of Lives
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
|
N/A
|
|
|
$
|
468
|
|
|
$
|
468
|
|
Buildings and Leasehold Improvements
|
|
|
19-30
|
|
|
|
5,083
|
|
|
|
10,266
|
|
Machinery and Equipment
|
|
|
3-11
|
|
|
|
25,116
|
|
|
|
24,014
|
|
Furniture and Fixtures
|
|
|
3-9
|
|
|
|
2,833
|
|
|
|
2,667
|
|
Enterprise Resource Planning System
|
|
|
5
|
|
|
|
10,625
|
|
|
|
|
|
Construction in Progress(i)
|
|
|
|
|
|
|
1,710
|
|
|
|
6,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,835
|
|
|
|
44,125
|
|
Less Accumulated Depreciation and Amortization
|
|
|
|
|
|
|
(24,066
|
)
|
|
|
(21,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
|
|
|
$
|
21,769
|
|
|
$
|
22,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Included in the Companys Construction in Progress balance
for the respective years ended April 30, 2010 and 2009, was
$1.3 million and $6.2 million related to its ERP
system. The Company placed $10.6 million of its ERP system
into service in October 2009 when it was implemented in one of
the Companys geographic locations. |
59
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation expense for the respective years ended
April 30, 2010, 2009 and 2008 was $5.3 million,
$3.9 million, and $3.6 million. Assets held under
capitalized leases and included in property and equipment were
$324,000 and $1.9 million as of April 30, 2010 and
2009. Accumulated depreciation on these assets was $245,000 and
$255,000 as of April 30, 2010 and 2009, 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.
The components of the Companys finite lived intangible
assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Patents
|
|
$
|
5,408
|
|
|
$
|
5,849
|
|
Less Accumulated Amortization
|
|
|
(1,774
|
)
|
|
|
(2,146
|
)
|
|
|
|
|
|
|
|
|
|
Patents, net
|
|
$
|
3,634
|
|
|
$
|
3,703
|
|
|
|
|
|
|
|
|
|
|
Patents are amortized on a straight-line basis over the legal
life of the underlying patents. The weighted average
amortization period for patents is 20 years.
Intangible assets with indefinite lives consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
2010
|
|
2009
|
|
Trademarks
|
|
$
|
870
|
|
|
$
|
753
|
|
Amortization expense for intangible assets with definite lives
for continuing operations for the respective years ended
April 30, 2010, 2009 and 2008 amounted to $425,000,
$365,000 and $282,000. The estimated annual amortization expense
is $450,000 for continuing operations for each year through
April 30, 2015.
|
|
Note 10
|
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. There were no
Company contributions made to the plan for the year ended
April 30, 2010. Company contributions and expenses under
the plan for the respective years ended April 30, 2009 and
2008 were $776,000 and $944,000.
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 monthly 4% of the employees base salary into a
designated investment account for the Pension Plan. The pension
benefit an employee is entitled to equals two months
salary with a maximum of 45 months salary, based upon
years of service. 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 2010
and 2009 was $27,000 and $46,000, respectively. The accumulated
benefit obligation, unrecognized net transition obligation, and
unrecognized loss as of April 30, 2010 were $995,000,
$16,000 and $27,000, respectively. The Companys projected
benefit payments under this plan over the next year are $258,000.
60
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Changes in the Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation beginning balance
|
|
$
|
1,492
|
|
|
$
|
1,815
|
|
Service Cost
|
|
|
28
|
|
|
|
37
|
|
Interest Cost
|
|
|
35
|
|
|
|
60
|
|
Actuarial (Gain)/Loss
|
|
|
(121
|
)
|
|
|
(249
|
)
|
Benefits Paid
|
|
|
(184
|
)
|
|
|
|
|
Foreign Exchange Adjustment
|
|
|
103
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation ending balance
|
|
$
|
1,353
|
|
|
$
|
1,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Changes in the Value of Plan Assets
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets beginning balance
|
|
$
|
1,188
|
|
|
$
|
1,237
|
|
Actual Return on Plan Assets
|
|
|
19
|
|
|
|
27
|
|
Employer Contribution
|
|
|
28
|
|
|
|
47
|
|
Benefits Paid
|
|
|
(184
|
)
|
|
|
|
|
Foreign Exchange Adjustment
|
|
|
84
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets ending balance
|
|
$
|
1,135
|
|
|
$
|
1,188
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions used to determine benefit obligations were
as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Discount rate
|
|
|
2.00
|
%
|
|
|
2.25
|
%
|
Expected rate of return on assets
|
|
|
2.00
|
%
|
|
|
1.50
|
%
|
Salary increase rate
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
Note 11
|
Long-Term
Obligations and Notes Payable
|
The Companys long-term obligations consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Long-term loan
|
|
$
|
|
|
|
$
|
1,879
|
|
Other financing arrangements
|
|
|
79
|
|
|
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
3,304
|
|
Less current maturities
|
|
|
(61
|
)
|
|
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
18
|
|
|
$
|
1,937
|
|
|
|
|
|
|
|
|
|
|
61
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The long-term loan as of April 30, 2009 was a variable rate
loan collateralized by the Companys building in Taiwan.
This loan had an annual interest rate of 3.67% and was scheduled
to mature in 2011. In fiscal year 2010, the Company paid off the
entire balance outstanding under this loan with no prepayment
penalty.
The Company leases certain office equipment under agreements
that are classified as capital leases. In the second quarter of
fiscal year 2010, the Company repaid the outstanding principal
of $1.2 million on the majority of these capital leases as
well as the total interest that would have accrued through the
dates of maturity. The Companys capital lease balance as
of April 30, 2010 was $79,000, of which $61,000 is recorded
in the Current Portion of Long-Term Obligations.
Notes payable balances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 30, 2009
|
|
|
Senior Credit Facility
|
|
$
|
350
|
|
|
$
|
13,000
|
|
Revolving credit facilities in Taiwan
|
|
|
|
|
|
|
2,226
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
350
|
|
|
$
|
15,226
|
|
|
|
|
|
|
|
|
|
|
Senior
Credit Facility
On June 10, 2009, the Company amended its $40 million
Senior Credit Facility Agreement which modified the maturity
date of the line to June 10, 2011 as well as certain
covenants that the Company is required to maintain.
In connection with the Companys sale of common stock
(refer to Note 14 Shareholders
Equity) the Company further amended its Senior Credit
Facility Agreement in August 2009, which adjusted the financial
covenants that it is required to maintain. The amendment
eliminated the requirement to maintain a minimum Consolidated
Adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA). EBITDA based on trailing four
quarters of $8 million. Under the amended covenants, the
Company was required to maintain the following ratios in each of
the fiscal year 2010 quarters:
|
|
|
|
|
|
|
|
|
|
|
Maximum Consolidated
|
|
Minimum Fixed Charge
|
|
|
Leverage Ratio(i)
|
|
Coverage Ratio(ii)
|
|
Fiscal Year 2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
3.25
|
x
|
|
|
2.0
|
x
|
Second Quarter
|
|
|
3.35
|
x
|
|
|
1.2
|
x
|
Third Quarter
|
|
|
3.50
|
x
|
|
|
1.2
|
x
|
Fourth Quarter
|
|
|
3.35
|
x
|
|
|
1.2
|
x
|
In fiscal year 2011, the Company will be required to maintain
the following ratios:
|
|
|
|
|
|
|
|
|
|
|
Maximum Consolidated
|
|
Minimum Fixed Charge
|
|
|
Leverage Ratio(i)
|
|
Coverage Ratio(ii)
|
|
Fiscal Year 2011
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.75
|
x
|
|
|
2.0
|
x
|
Thereafter
|
|
|
2.50
|
x
|
|
|
2.0
|
x
|
|
|
|
(i) |
|
Defined as the ratio of consolidated indebtedness, excluding the
subordinated notes issued to OMAX, to consolidated adjusted
EBITDA for the most recent four fiscal quarters. |
|
(ii) |
|
Defined as the ratio of consolidated adjusted EBITDA, less
income taxes and maintenance capital expenditures, during the
most recent four quarters to the sum of interest charges during
the most recent four quarters and scheduled debt repayments in
the next four quarters. |
62
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The revised covenants also require the Company to meet a
liquidity test such that its consolidated indebtedness shall not
exceed the total of 65% of the book value of its accounts
receivable and 40% of the book value of its inventory.
A violation of any of the covenants above 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
Company was in compliance with all its financial covenants as of
April 30, 2010, as amended.
All of the Companys domestic assets, including certain
interests in some foreign subsidiaries, are pledged as
collateral under its Senior Credit Facility Agreement. Interest
on the Line of Credit is based on the banks prime rate or
LIBOR rate plus a percentage spread between 3.25% and 4.5%
depending on whether it uses the banks prime rate or LIBOR
rate and based on the Companys current leverage ratio. The
Company also pays an annual letter of credit fee equal to 3.5%
of the amount available to be drawn under each outstanding
stand-by letter of credit. The annual letter of credit fee is
payable quarterly in arrears and varies depending on the
Companys leverage ratio.
As of April 30, 2010, the Company had $35.0 million
available under its Line of Credit, net of $350,000 drawn
against the Line of Credit, bearing interest at 5.25% per annum,
and $4.6 million in outstanding letters of credit which
reduce amounts available under the Senior Credit Facility
Agreement. As of April 30, 2010, based on the
Companys maximum allowable leverage ratio, the incremental
amount it could have borrowed under its Lines of Credit would
have been approximately $14.5 million.
Revolving
Credit Facility in Taiwan
There were no outstanding balances under the Companys
unsecured Taiwan credit facilities as of April 30, 2010.
The total unsecured commitment for the Taiwan credit facilities
totaled $2.8 million at April 30, 2010, bearing
interest at 2.5% per annum.
|
|
Note 12
|
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).
Assets
and Liabilities Measured at Fair Value on a Recurring
Basis
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). The Company records
derivatives at fair value. Historically, such derivatives have
consisted primarily of foreign currency forward contracts for
which hedge accounting has not been applied. The Company has
therefore marked such forward contracts to market with an
unrealized gain or loss for the
mark-to-market
valuation. Such forward contracts were classified under
Level 2 because such measurements are determined using
published market prices or estimated based on observable inputs
such as future exchange rates.
63
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of derivative instruments on the Consolidated
Statement of Operations for the respective years ended
April 30, 2010, 2009 and 2008 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
|
|
2010
|
|
2009
|
|
2008
|
|
Foreign exchange forward contracts
|
|
|
Other Income (Expense
|
)
|
|
$
|
|
|
|
$
|
1,232
|
|
|
$
|
113
|
|
There were no open forward exchange contracts for the respective
years ended April 30, 2010 and April 30, 2009.
Accordingly, the Company had no financial assets and liabilities
that qualified for fair value measurement and disclosure.
Assets
and Liabilities Measured at Fair Value on a Nonrecurring
Basis
Nonfinancial nonrecurring assets and liabilities included on the
Companys Consolidated Balance Sheets consist of long-lived
assets, including cost-method investments and long-term
subordinated notes issued to OMAX, that are measured at fair
value and tested and measured for impairment, when necessary.
Cost
Method Investment
As of April 30, 2010, the carrying value of the
Companys investment in Dardi was $3.7 million. The
fair value of the Companys investment in Dardi was not
estimated as there were no events or changes in circumstances
that may have a significant adverse effect on the fair value of
the investment, and the Companys management determined
that it was not practicable to estimate the fair value of the
investment. Further, there are no quoted market prices for the
Companys investment, and sufficient information is not
readily available for the Company to utilize a valuation model
to determine its fair value without incurring excessive costs
relative to the materiality of the investment. The
Companys cost method investment is evaluated, on at least
a quarterly basis for potential
other-than-temporary
impairment, or when an event of change in circumstances has
occurred, that may have a significant adverse effect on the fair
value of the investment.
Impairment indicators the Company considers in each reporting
period include the following: whether there has been a
significant deterioration in earnings performance, asset quality
or business prospects; a significant adverse change in the
regulatory, economic, or technological environment; a
significant adverse change in the general market condition or
geographic area in which the investment operates; industry and
sector performance; current equity and credit market conditions;
any bona fide offers to purchase the investment for less than
the carrying value; and factors that raise significant concern,
such as negative cash flow from operations or working capital
deficiencies. Since there is no active trading market for this
investment, it is for the most part illiquid. Future changes in
market conditions, the future performance of the investment, or
new information provided by Dardis management could affect
the recorded value of the investment and the amount realized
upon liquidation. Due to the significant unobservable inputs,
the fair value measurements used to evaluate impairment are a
Level 3 input.
Subordinated
Notes
In fiscal year 2010, the Company had an initial measurement of
long-term subordinated notes issued to OMAX. These notes were
issued to OMAX during the second quarter of fiscal year 2010.
These subordinated notes do not trade in an active market and,
therefore observable price quotations are not available. In the
absence of observable price quotations, the fair value was
determined based on a discounted cash flow model which
incorporated the effects of the Companys own credit risk
in the fair value of the liability. The cash flow assumptions
were based on the Companys contractual cash flows and the
anticipation that the Company will pay the debt according to its
contractual terms and were considered Level 3 inputs.
Specifically, in
64
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
calculating the fair value of these notes, the Company used a
four-year maturity date of August 17, 2013 and a discount
rate of 10% which is the rate at which management believes the
Company can obtain financing of a similar nature from other
sources. Since there have been no material changes in the
Companys financial condition and no material modifications
to the subordinated notes, the estimated fair value of these
notes approximates carrying value as of April 30, 2010. The
carrying amount of these notes as of April 30, 2010 was
$8.0 million.
The carrying values of the Companys current assets and
liabilities due within one-year approximate fair values due to
the short-term maturity of these instruments.
|
|
Note 13
|
Commitments
and Contingencies
|
The Companys commitments and contingencies include:
|
|
|
|
|
Lease commitments;
|
|
|
|
Warranty obligations;
|
|
|
|
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 $3.2 million,
$3.0 million and $3.0 million for the respective years
ended April 30, 2010, 2009 and 2008.
Future minimum rents payable under operating leases for years
ending April 30 are as follows:
|
|
|
|
|
2011
|
|
$
|
3,031
|
|
2012
|
|
|
1,933
|
|
2013
|
|
|
968
|
|
2014
|
|
|
19
|
|
2015
|
|
|
8
|
|
2016 and thereafter
|
|
|
8
|
|
|
|
|
|
|
|
|
$
|
5,967
|
|
|
|
|
|
|
Warranty
Obligations
The Companys estimated obligations for warranty, which are
included as part of Costs of Sales on the Consolidated
Statements of Operations, 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
its warranty accrual as of April 30, 2010, which is
included in the Other Accrued Liabilities line item on the
Consolidated Balance Sheet, is sufficient to cover expected
warranty costs.
65
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the fiscal year 2010 and 2009 activity
for the Companys warranty accrual:
|
|
|
|
|
Accrued warranty balance as of May 1, 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
|
|
Accruals for warranties of fiscal year 2010 sales
|
|
|
3,367
|
|
Warranty costs incurred in fiscal year 2010
|
|
|
(3,257
|
)
|
|
|
|
|
|
Accrued warranty balance as of April 30, 2010
|
|
$
|
2,533
|
|
|
|
|
|
|
Product
Liability
Currently there are outstanding product liability claims arising
out of the sale of current and former products of the Company.
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 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. 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.
In litigation arising out of a June 2002 incident at a Crucible
Metals (Crucible) facility, the Companys
excess insurance carrier notified the Company that it would
contest its obligation to provide coverage for the property
damage. The carrier has settled the original claims relating to
this incident for a total of approximately $3.4 million, as
compared to the original claims sought of approximately
$7.0 million. 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
$3.4 million is reasonably possible.
In June 2007, the Company received a claim seeking the return of
approximately $1 million paid by Collins and Aikman
Corporation, a customer, as preference payments. The Company
vigorously contested this claim and ultimately settled this
matter in fiscal year 2010 for $120,000.
Other Legal Proceedings For matters other
than those described above, the Company does not believe that
any of its other legal proceedings will have a material adverse
effect on its consolidated financial position, results of
operations or cash flows.
66
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Claims or Assessments
In fiscal year 2009, the Company was notified by the Purchaser
of its Avure Business (Purchaser), which was
reported as a discontinued operation for the year ended
April 30, 2006, that the Swedish Tax Authority was
conducting an audit which included periods during the time that
the Company owned the subsidiary. Pursuant to an agreement with
the purchaser, the Company had made commitments to indemnify
various liabilities and claims, including any tax matters when
it owned the business. The Swedish tax authority concluded its
audit and issued a final report in November 2009 asserting that
Avure owes 19.5 million Swedish Krona in additional taxes,
penalties and fines. In April 2010, the Company filed an appeal
to contest the findings by the Swedish Tax Authority. While the
Company intends to continue contesting the findings, an
equivalent of $1.2 million was accrued in fiscal year 2010
related to the periods during which it owned Avure. This amount
was accounted for as an adjustment to the loss on the disposal
of the Avure Business and is reported as a charge to
discontinued operations in the Companys Consolidated
Statement of Operations. The balance of the accrued liability
will fluctuate period over period with changes in foreign
currency rates until such time as the matter is ultimately
resolved.
|
|
Note 14
|
Shareholders
Equity
|
Sale
of Common Stock
In September 2009, the Company completed an underwritten public
offering of 8,998,750 shares of common stock at an offering
price of $2.10 per share, which included 1,173,750 shares
issued as a result of the underwriters exercise of their
over-allotment option in full. The offering generated net
proceeds of approximately $17.2 million after deducting
underwriting commissions and estimated offering expenses. The
proceeds from this offering were used to reduce the
Companys outstanding debt, including amounts outstanding
under its Senior Credit Facility.
Change
to Authorized Stock
In September 2009, the Company filed Articles of Amendment of
Restated Articles of Incorporation with the Washington Secretary
of State (the Articles of Amendment). Prior
to the filing of the Articles of Amendment, the Restated
Articles of Incorporation of the Company provided for the
authorization of two classes of stock, consisting of
49,000,000 shares designated as common stock, and
1,000,000 shares designated as preferred stock. In
connection with the Articles of Amendment, the authorized stock
of the Company was increased to 85,000,000 shares,
consisting of 84,000,000 shares of common stock and
1,000,000 shares of preferred stock. The Articles of
Amendment were approved by the Board of Directors of the Company
and by the shareholders of the Company at the Annual Meeting of
Shareholders held on September 10, 2009. All other
provisions of the Companys Restated Articles of
Incorporation remain the same.
Common
Share Rights Purchase Plan
The Company entered into a Rights Agreement, effective as of
September 1, 2009, between the Company and Mellon Investor
Services LLC, as Rights Agent (the Rights
Agent). The Rights Agreement replaced the
Companys existing Preferred Share Rights Purchase Plan,
which had been in effect since 1990 and that expired on
September 1, 2009. On August 28, 2009, the Board of
Directors of the Company declared a dividend of one common share
purchase right (a Right) for each outstanding
share of common stock, $0.01 par value per share of the
Company. Each Right entitles the registered holder to purchase
from the Company one share of Common Stock at a price per share
of $18.00 (as the same may be adjusted, the Purchase
Price).
The Rights are not exercisable until after the date of
commencement of, or the first public announcement of an
intention to commence, a tender offer or exchange offer the
consummation of which would result in the
67
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
beneficial ownership by a person (other than an Exempted Entity)
or group of 15% or more of the shares of Common Stock then
outstanding (the earlier of such dates being herein referred to
as the Distribution Date. The Rights will
expire on September 1, 2019 (the Final Expiration
Date), unless the Final Expiration Date is extended or
unless the Rights are earlier redeemed or exchanged by the
Company, in each case as described below. The Purchase Price
payable, and the number of shares of Common Stock or other
securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution
(i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Common Stock,
(ii) upon the grant to holders of the Common Stock of
certain rights or warrants to subscribe for or purchase Common
Stock at a price, or securities convertible into Common Stock
with a conversion price, less than the then-current market price
of the Common Stock or (iii) upon the distribution to
holders of the Common Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends or dividends
payable in Common Stock) or of subscription rights or warrants
(other than those referred to above).
Warrant
Repurchase
In fiscal year 2008, 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 a 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.
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 15
|
Stock-based
Compensation
|
The Company recognizes share-based 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. At the Annual Meeting of
Shareholders held on September 10, 2009, shareholders of
the Company approved an amendment to the 2005 Plan which
provided for an increase in the aggregate number of shares of
common stock that may be issued pursuant to this Plan from
2,500,000 shares to 5,000,000 shares issuable in the
form of stock, stock units, stock options, stock appreciation
rights, or cash awards.
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
68
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 summarizes stock option activities for the
year ended April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Term (Years)
|
|
|
Outstanding at May 1, 2009
|
|
|
798,810
|
|
|
$
|
10.49
|
|
|
$
|
|
|
|
|
5.16
|
|
Granted during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired or forfeited during the period
|
|
|
(170,728
|
)
|
|
|
10.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2010
|
|
|
628,082
|
|
|
$
|
10.48
|
|
|
$
|
|
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2010
|
|
|
390,622
|
|
|
$
|
10.50
|
|
|
$
|
|
|
|
|
3.33
|
|
Vested at April 30, 2010
|
|
|
390,622
|
|
|
|
10.50
|
|
|
|
|
|
|
|
3.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Total intrinsic value of options exercised
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,262
|
|
Total fair value of options vested
|
|
|
345
|
|
|
|
345
|
|
|
|
|
|
Cash received from exercise of share options
|
|
|
|
|
|
|
|
|
|
|
1,198
|
|
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. There
were no options granted during the year ended April 30,
2010. Information pertaining to the Companys assumptions
to calculate the fair value of the stock options granted during
the respective years ended April 30, 2009 and
April 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
2009
|
|
2008
|
|
Options granted
|
|
|
236,210
|
|
|
|
200,000
|
|
Weighted average grant-date fair value of stock options granted
|
|
$
|
5.67
|
|
|
$
|
6.90
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
Weighted average expected volatility
|
|
|
60.00
|
%
|
|
|
62.02
|
%
|
Risk-free interest rate
|
|
|
3.09
|
%
|
|
|
4.98
|
%
|
Weighted average expected term (in years)
|
|
|
6
|
|
|
|
6
|
|
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 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.
69
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the respective years ended April 30, 2010, 2009 and
2008, the Company recognized compensation expense related to
stock options of $581,000, $600,000, and $172,000, 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, 2010, total unrecognized compensation cost
related to nonvested stock options was $879,000 which is
expected to be recognized over a weighted average period of
1.7 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 respective years ended
April 30, 2010 and April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at May 1, 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
|
|
|
|
8.78
|
|
Granted during the period
|
|
|
1,068,610
|
|
|
|
2.23
|
|
Forfeited during the period
|
|
|
(134,915
|
)
|
|
|
4.65
|
|
Vested during the period
|
|
|
(98,291
|
)
|
|
|
8.91
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2010
|
|
|
1,237,959
|
|
|
$
|
3.57
|
|
|
|
|
|
|
|
|
|
|
For the respective years ended April 30, 2010, 2009 and
2008, the Company recognized compensation expense related to
service-based stock awards of $1.3 million,
$1.1 million and $732,000. As of April 30, 2010, total
unrecognized compensation cost related to service-based stock
awards of $3.2 million is expected to be recognized over a
weighted average period of 2.2 years.
Performance-Based
Stock Awards
In fiscal year 2007, the Company adopted a Long-Term Incentive
Plan (the LTIP) under which executive officers were
to receive stock awards based on certain performance targets,
which were to be measured over a three-year performance period.
It was anticipated that awards to be granted would vary based on
the degree to which the Companys performance met or
exceeded those predetermined thresholds at the end of the
performance period and no payout would occur unless the Company
exceeded certain minimum threshold performance targets. The
Company did not recognize any compensation expense related to
this LTIP for the respective years ended April 30, 2009 and
2008 as the achievement of the performance criteria was not met.
The LTIP expired at the end of fiscal year 2009 and the Company
did not have any similar plans for fiscal year 2010.
70
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the LTIP activities for the year
ended April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at May 1, 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 components of consolidated income (loss) before income taxes
include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income (Loss) from Continuing Operations Before Provision
(Benefit) for Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(3,478
|
)
|
|
$
|
(26,708
|
)
|
|
$
|
11,546
|
|
Foreign
|
|
|
(6,755
|
)
|
|
|
(4,608
|
)
|
|
|
3,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10,233
|
)
|
|
$
|
(31,316
|
)
|
|
$
|
15,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal
|
|
$
|
321
|
|
|
$
|
(72
|
)
|
|
$
|
298
|
|
State
|
|
|
34
|
|
|
|
89
|
|
|
|
124
|
|
Foreign
|
|
|
851
|
|
|
|
1,453
|
|
|
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Tax Expense (after NOL Benefit of $1,136, $868, and
$6,312)
|
|
|
1,206
|
|
|
|
1,470
|
|
|
|
4,475
|
|
Federal
|
|
|
(1,969
|
)
|
|
|
(8,105
|
)
|
|
|
(9,347
|
)
|
State
|
|
|
70
|
|
|
|
(743
|
)
|
|
|
(2,376
|
)
|
Foreign
|
|
|
(2,151
|
)
|
|
|
(852
|
)
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Expense (Benefit) (Net of Change in Valuation
Allowance of $(182), $1,372, and $(17,453)
|
|
|
(4,050
|
)
|
|
|
(9,700
|
)
|
|
|
(11,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tax Provision (Benefit)
|
|
$
|
(2,844
|
)
|
|
$
|
(8,230
|
)
|
|
$
|
(6,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reconciliation between the Companys effective tax rate
on income from continuing operations and the statutory tax rate
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income tax provision (benefit) at federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
State and local taxes net of federal tax benefit
|
|
|
0.7
|
|
|
|
(1.4
|
)
|
|
|
3.1
|
|
Foreign tax rate differential
|
|
|
5.7
|
|
|
|
0.4
|
|
|
|
(4.4
|
)
|
Change in valuation allowance
|
|
|
(1.7
|
)
|
|
|
7.9
|
|
|
|
(113.1
|
)
|
Non deductible/nontaxable items
|
|
|
5.7
|
|
|
|
2.1
|
|
|
|
3.3
|
|
Foreign earnings not previously subject to U. S. tax
|
|
|
(0.7
|
)
|
|
|
0.3
|
|
|
|
6.1
|
|
Foreign withholding taxes
|
|
|
0.7
|
|
|
|
1.9
|
|
|
|
8.9
|
|
Foreign income taxes
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Alternative minimum taxes
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
Stock based compensation
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.8
|
|
Tax credits
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
2.8
|
|
Statutory to U.S. GAAP adjustments
|
|
|
|
|
|
|
(3.0
|
)
|
|
|
9.9
|
|
Prior year reconciled amounts
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
1.8
|
|
|
|
(0.2
|
)
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
(27.9
|
)%
|
|
|
(26.2
|
)%
|
|
|
(43.3
|
)%
|
During the current year, the Company recorded certain out of
period adjustments to reduce its deferred tax liabilities.
Components of the net deferred tax assets (liabilities) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 30, 2009
|
|
|
Current deferred tax assets/(liabilities):
|
|
|
|
|
|
|
|
|
Accrued settlement
|
|
$
|
|
|
|
$
|
5,585
|
|
Deferred acquisition costs
|
|
|
|
|
|
|
1,402
|
|
Deposits on future sales
|
|
|
(786
|
)
|
|
|
(547
|
)
|
Net operating loss carryforwards
|
|
|
709
|
|
|
|
705
|
|
Other current assets
|
|
|
3,265
|
|
|
|
2,877
|
|
Other current liabilities
|
|
|
(301
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
Current Deferred Tax Assets
|
|
|
2,887
|
|
|
|
9,917
|
|
Valuation allowance
|
|
|
(1,502
|
)
|
|
|
(1,883
|
)
|
|
|
|
|
|
|
|
|
|
Total Current Deferred Tax Assets
|
|
|
1,385
|
|
|
|
8,034
|
|
|
|
|
|
|
|
|
|
|
72
FLOW
INTERNATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)