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, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-12448
FLOW INTERNATIONAL
CORPORATION
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Washington
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91-1104842
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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23500 - 64th Avenue South
Kent, Washington 98032
(253) 850-3500
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock $.01 Par Value
Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o.
Indicate by check mark 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)
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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
$305,081,732 as of October 31, 2007, the last business day
of the registrants most recently completed second fiscal
quarter, based on a closing price of $8.41 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 37,591,478 shares of Common Stock,
$0.01 par value per share, outstanding as of July 3,
2008.
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, 2008 (the 2009
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 2009 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.
Explanatory
Note:
This
Form 10-K
reflects the restatement of the Companys Consolidated
Financial Statements for the years ended April 30, 2007 and
April 30, 2006 and the related Selected Financial Data in
Item 6 herein and Managements Discussion and Analysis
of Financial Condition and Results of Operations in Item 7
herein. The restatement is more fully described in Note 20
to the Consolidated Financial Statements under Item 8,
Financial Statements and Supplementary Data
herein.
In addition, as disclosed in Note 18 to the consolidated
financial statements, certain restatement adjustments affected
interim quarterly financial information for 2008 and 2007. Such
restatement adjustments have been reflected in the unaudited
selected quarterly financial data appearing herein and, with
respect to 2008, will be reflected in our 2009 Quarterly Reports
on
Form 10-Q
as they are filed during the fiscal year ending April 30,
2009.
We have not amended our previously filed Annual Report on
Form 10-K
or our Quarterly Reports on
Form 10-Q
for the periods affected by the restatement adjustments, and
accordingly, the financial statements and related financial
information contained in such reports should no longer be relied
upon.
2
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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our belief that waterjet technology is in the early adoption
phase of its product life cycle;
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our belief that our on-time delivery and technical service
combine for the best all-around value for our customers;
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our belief that while competitors generally offer a lower
price, the quality of our parts, coupled with our service, makes
us the value leader in spares and consumables;
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our belief that our principal properties are adequate for our
present needs and that supplemented by planned improvements and
construction, we expect them to remain adequate for the
foreseeable future;
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our belief that the strategies and actions we intend to take
in fiscal year 2009 and beyond, including increasing market
awareness of waterjet technology to drive increased market
penetration and improvement of our operational efficiency, will
help us achieve our long-term goals of compound annual revenue
growth rate of 10% and operating income annual growth rate of at
least 20%;
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our belief that we will be able to fund the commitments for
inventory purchases, including all open purchase orders, with
existing cash and our cash flows from operations in future
periods
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our investment in the development of innovative products and
services to maintain our technological leadership position as
well as enhancement of our current product lines;
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our intent to continue to make improvements to our system of
internal controls and to continue to make improvements in the
documentation and implementation training of our accounting
policies;
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our ability to absorb cyclical downturns through the
flexibility of our ultrahigh-pressure technology and market
diversity;
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our ability to retain a technical lead over our competitors
through non-patented proprietary trade secrets and know-how in
ultrahigh-pressure applications;
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our plan to continue capital spending on information
technology and facilities and our expectation that the funds
necessary for this will be generated internally;
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our expectation that for matters other than Omax, Crucible,
and Collins and Aikman, these pending legal proceedings will not
have a material adverse effect on our consolidated financial
position;
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our expectation that our credit line will provide us with
liquidity that could be used to make acquisitions, or fund the
repurchase of shares;
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our belief that our existing cash, our cash from operations,
and credit facilities at April 30, 2008 are adequate to
fund our operations for the next twelve months;
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our expectation that our unrecognized tax benefits will not
change significantly within the next twelve months.
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Additional information on these and other factors that could
affect our financial results is set forth below. Finally, 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.
4
PART I
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Item 1.
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Description
of the Business
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Business
Overview
Flow International Corporation and its subsidiaries (hereinafter
collectively referred to as the Company,
we, or our unless the context requires
otherwise) is a technology-based global company providing
customer-driven waterjet cutting and cleaning solutions. Our
ultrahigh-pressure water pumps generate pressures from 40,000 to
over 87,000 pounds per square inch (psi) and power waterjet
systems that are used to cut and clean materials. Waterjet
cutting is a fast-growing alternative to traditional cutting
methods 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, what we do and
where we are headed. Unless otherwise specified, current
information reported in this
Form 10-K
is as of, or for the year ended April 30, 2008.
Our
History
Flow International Corporation was incorporated in Delaware in
1983 as Flow Systems, Inc. and was reincorporated in Washington
in October 1998. Our innovations and accomplishments through the
years include:
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Invented abrasive waterjet system in 1979
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First to introduce ultrahigh-pressure direct drive pumps up to
55,000 psi in 2000
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First to introduce
WindowsR-based
intelligent waterjet control software
FlowMastertm
to the industry
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First to introduce a 60,000 psi intensifier pump in 1998
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First to develop advanced motion control waterjet
Dynamic
WaterjetR
to increase cut accuracy and speed
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3-Dimensional
5-Axis
Waterjet machining capability
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Introduced 87,000 psi Intensifier Pump in 2006 which
is still unmatched by competition
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Business
Segments
We operate in four reportable segments, which are North America
Waterjet, Asia Waterjet, Other International Waterjet and
Applications. The North America, Asia, and Other International
Waterjet segments include our cutting and cleaning systems using
ultrahigh-pressure as well as parts and services further
described below in the respective geographic areas. The
Applications segment includes systems for robotic articulation
applications and automation systems which may or may not use
ultrahigh-pressure. These systems are primarily used in
automotive applications. Effective September 2007, our
Applications segment ceased the pursuit of sales of non-waterjet
automation systems to focus on increasing revenue from systems
that integrate waterjet cutting technology.
For further discussion on our business segments, see
Note 16: Business Segments and Geographic Information
of the Consolidated Financial Statements.
Sales
Outside the United States
In fiscal year 2008, 55% or
$133.3 million of our total consolidated sales
were to customers outside the United States, this included:
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$19.6 million of exports from the United States;
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$56.4 million of sales from Europe; and
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$57.3 million of sales from our other foreign locations
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5
Products
and Services
Our mission is to provide the highest value customer-driven
waterjet cutting and cleaning solutions. We strive to improve
our customers profitability through the development of
innovative products and services that expand our customers
markets and increase their productivity. The primary components
of our product line include versatile waterjet cutting and
industrial cleaning systems. We provide total system solutions
for various industries including aerospace, automotive, stone
and tile, job shop, and industrial cleaning.
Our ultrahigh-pressure technology has two broad applications:
cutting and cleaning.
Waterjet Cutting. The primary application of
our ultrahigh-pressure water pumps is cutting. In cutting
applications, an ultrahigh-pressure pump pressurizes water from
40,000 to 87,000 psi, and forces it through a small orifice,
generating a high-velocity stream of water traveling at three or
more times the speed of sound. In order to cut metallic and
other hard materials, an abrasive substance, usually garnet is
added to the waterjet stream creating an abrasive jet. Our
cutting systems typically include a robotic manipulator that
moves the cutting head. Our systems may also combine waterjet
with other applications such as conventional machining, pick and
place handling, inspection, assembly, and other automated
processes. Our waterjet cutting systems cut virtually any shape
in a single step with edge quality that usually requires no
secondary finishing and are the most productive solutions for
cutting a wide range of materials from
1/16
inch to over 24 inches thick. We offer two different pump
technologies: ultrahigh-pressure intensifier and direct drive
pumps, ensuring our customers get the pump that is right for
them and their unique application. Our intensifier pumps
pressurize water up to 87,000 psi, and our direct drive pumps
pressurize water up to 55,000 psi.
Waterjet cutting is recognized as a more flexible, cost
effective and accurate alternative to traditional cutting
methods such as lasers, saws or plasma. It has greater
versatility in the types of products it can cut, and, because it
cuts without heat or imparted energy, often reduces or
eliminates the need for secondary processing operations and
special fixturing. Therefore, waterjet cutting has applications
in many industries, including aerospace, defense, automotive,
semiconductors, disposable products, food, glass, job shop,
sign, metal cutting, marble, tile and other stone cutting, and
paper slitting and trimming.
Industrial Cleaning Products. Our
ultrahigh-pressure industrial cleaning systems are used in
waterjet cleaning for fast surface preparation. These systems
use direct drive pumps to create pressures in the range of
40,000 to 55,000 psi. Because only pure water is used to remove
coatings, waterjetting costs less than grit blasting by
eliminating the need for collection, containment, and disposal
of abrasive. Removing coatings with water instead of grit allows
for other work to be done during the waterjet operation. Steel,
mechanical and electrical work, or painting, can be performed
concurrently with waterjet industrial cleaning, which means
projects are completed in less time and there are fewer
environmental concerns than with traditional methods such as
sandblasting.
Parts and Services. We also offer consumable
parts and services. Consumables represent parts used by the pump
and cutting head during operation, such as seals and orifices.
Many of the consumable or spare parts are proprietary in nature
and are patent protected. We also sell various tools and
accessories which incorporate ultrahigh-pressure technology, as
well as aftermarket consumable parts and service for our
products.
Marketing
and Customers
Our marketing emphasizes a consultative application-oriented
sales approach and is centered on increased awareness of the
capabilities of our technology as we believe that waterjet
technology is in the early adoption phase of its product life
cycle. These efforts include increased 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 the effectiveness of sales efforts, our
marketing staff and sales force gather detailed information on
the applications and requirements in targeted market segments.
We also utilize telemarketing and the Internet to generate sales
leads in addition to lead generation through tradeshows and
print media. This information is used to develop standardized
and customized solutions using ultrahigh-pressure and robotics
technologies.
6
We offer our spare parts and consumables through the Internet at
our Flowparts.com website in the U.S. and
Floweuropeparts.com in Europe where we strive to ensure that we
are able to ship a large number of parts within 24 hours to
our customers. We are currently evaluating this option for our
other international markets.
We have established strong relationships with a diverse set of
customers. No single customer or group of customers under common
control accounted for 10% or more of our total consolidated
sales in fiscal year 2008.
Our sales are affected by worldwide economic changes. However,
we believe that our ability to gain market share in the machine
cutting tool market due to the productivity enhancing nature of
our ultrahigh-pressure technology and the diversity of our
markets, along with the relatively early adoption phase of our
technology, enable us to absorb cyclical downturns with less
impact than conventional machine tool manufacturers.
Competition
in Our Markets
Our major markets both domestic and
foreign are highly competitive, with our products
competing against other waterjet competitors as well as
technologies such as lasers, saws, plasma, shears, routers,
drills, and abrasive blasting techniques. Most of our waterjet
competitors provide only portions of a waterjet system such as
pumps or control systems. Other competitors integrate components
from a variety of suppliers to provide a complete solution.
Under the Flow brand, we compete in the high-end and mid-tier
segments of the waterjet cutting market through product quality
and superior service reliability, value, service and technology.
Through our secondary brand, Waterjet
Protm,
we compete in the lower priced segments of the market.
Approximately 80 firms, other than Flow, have developed tools
for cleaning and cutting based on waterjet technology. We
believe we are the leader in the global waterjet cutting systems
market.
Waterjet technology provides manufacturers with an alternative
to traditional cutting or cleaning methods, which utilize
lasers, saws, knives, shears, plasma, routers, drills and
abrasive blasting techniques. Many of the companies that provide
these competing methods are larger and more established than
Flow.
Waterjet cutting systems offer manufacturers many advantages
over traditional cutting machines including an ability to cut or
machine virtually any material, in any direction, with improved
manufacturing times, and with minimal impact on the material
being cut. These factors, in addition to the elimination of
secondary processing in many circumstances, enhance the
manufacturing productivity of our systems.
We estimate that the waterjet cutting solutions market
opportunity exceeds $1 billion in annual potential or twice
the current level. The total market potential continues to grow
as new applications are developed. The rapidly increasing global
market for waterjet solutions while providing high growth
opportunities is also attracting new market entrants which will
increase competition.
In addition to pumps and systems, we sell spare parts and
consumables. We believe our on-time delivery and technical
service combine for the best all-around value for our customers
but, we face competition from numerous other companies who sell
non-proprietary replacement parts for our machines. While they
generally offer a lower price, we believe the quality of our
parts, coupled with our service, makes us the value leader in
spares and consumables.
Raw
Materials
We depend on the availability of raw materials, parts and
subassemblies from our suppliers and subcontractors. Principal
materials used to make waterjet products are metals, and
plastics, typically in sheets, bar stock, castings, forgings and
tubing. We also purchase many electrical and electronic
components, fabricated metal parts, high-pressure fluid hoses,
ball screws, seals and other items integral to our products.
Suppliers are competitively selected based on cost, quality, and
delivery. Our suppliers ability to provide timely and
quality raw materials, components, kits and subassemblies
affects our production schedules and contract profitability. We
maintain an extensive qualification and performance surveillance
system to control risk associated with this reliance on the
supply chain. Most significant raw materials we use are
available through multiple sources.
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Our strategic sourcing initiatives seek to find ways of
mitigating the inflationary pressures of the marketplace. In
recent years, these inflationary pressures have affected the
market for raw materials. The weakening dollar is also causing
our supply chain to feel abnormal cost pressures. These factors
may force us to renegotiate with our suppliers and customers to
avoid a significant impact to our margins and results of
operations. These macro-economic pressures may increase our
operating costs with consequential risk to our cash flow and
profitability. We currently do not employ forward contracts or
other financial instruments to hedge commodity price risk,
although we continuously explore supply chain risk mitigation
strategies.
Intellectual
Property
We have a number of patents related to our processes and
products both domestically and internationally. While in the
aggregate our patents are of material importance to our
business, we believe that no single patent or group of patents
is of material importance to our business as a whole. We also
rely on non-patented proprietary trade secrets and knowledge,
confidentiality agreements, creative product development and
continuing technological advancement to maintain a technological
lead on our competitors.
Product
Development
Our research and development is focused on continued improvement
of our existing products and the development of new products.
During the year ended April 30, 2008, we expensed
$8.3 million related to product research and development as
compared to $8.7 million for 2007 and $6.7 million for
2006. Our future success depends on our ability to continue to
maintain a robust research and development program that allows
us to develop competitive new products and applications that
satisfy customer requirements, as well as enhance our current
product lines. Research and development costs were between 3%
and 4% of total revenue during each of the years ended
April 30, 2008, 2007, and 2006.
Backlog
Our backlog increased 14% from $31.0 million at
April 30, 2007 to $35.3 million at April 30,
2008. The backlog at April 20, 2008 and 2007 represented
14% of our trailing twelve months sales in each of the
respective periods.
Backlog includes firm orders for which written authorizations
have been accepted and revenue has not yet been recognized.
Generally our products, exclusive of the aerospace product line,
can be shipped within a four to 16 week period. Aerospace
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. The changes in our backlog are not
necessarily indicative of comparable variations in sales or
earnings. Due to possible customer changes in delivery schedules
and cancellation of orders, our backlog at any particular date
is not indicative of actual sales for any succeeding period.
Delays in delivery schedules
and/or a
reduction of backlog during any particular period could have a
material adverse effect on our business and results of
operations.
Working
Capital Practices
There are no special or unusual practices relating to our
working capital items. We generally require advance payments as
deposits on customized equipment and standard systems and
require progress payments during the manufacturing of these
products or prior to product shipment.
Employees
We had approximately 759 full time employees as of
April 30, 2008 compared to 756 in the prior year. This
number includes 59% located in the United States and 41% located
in other foreign locations. Our success depends in part on our
ability to attract and retain employees. None of our employees
are covered by collective bargaining agreements. We continue to
have satisfactory employee relations.
8
Available
Information
The Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports are available free of charge
on the Companys website at www.flowcorp.com as soon as is
reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission.
The materials we file with the SEC may be read and copied at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549 and can also be obtained by
calling the SEC at
1-800-SEC-0330.
Information available on our website is not incorporated by
reference in and is not deemed a part of this
Form 10-K.
We are subject to certain risks and events that, if one or more
of them occur, could adversely affect our business, our
financial condition and our 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 Industry and Business
We are
experiencing increased competition in our markets, and the
failure to complete effectively could have an adverse effect on
our business, financial condition, and results of
operations.
We are facing increased competition in a number of our served
markets as a result of the entry of new competitors, some of
which have greater financial resources or lower production costs
than we do. In order to compete effectively, we must retain our
relationships with existing customers, establish relationships
with new customers, continually develop new products and
services designed to maintain our leadership technology position
and penetrate new markets. 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.
If we
are unable to complete the upgrades to our information
technology systems that are currently in process, or our
upgrades are unsuccessfully implemented, our future success may
be negatively impacted.
In order to maintain our leadership position in the market and
efficiently process increased business volume, we are making a
significant multi-year upgrade to our computer hardware,
software and our Enterprise Resource Planning (ERP)
system. Should we be unable to continue to fund this upgrade, or
should the ERP system upgrade be unsuccessful or take longer to
implement than anticipated, our ability to grow the business and
our financial results could be adversely impacted.
9
International
economic, political, legal and business factors could negatively
affect our results of operations, cash flows and financial
condition.
In 2008, approximately 55% 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, two of our manufacturing
operations 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:
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interruption in the transportation of materials to us and
finished goods to our customers;
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changes in a specific countrys or regions political
or economic conditions;
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trade protection measures;
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import or export licensing requirements;
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unexpected changes in laws or licensing and regulatory
requirements, including negative consequences from changes in
tax laws;
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limitations on ownership and on repatriation of earnings;
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difficulty in staffing and managing widespread operations;
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differing labor regulations;
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differing protection of intellectual property; and
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terrorist activities and the U.S. and international
response thereto.
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Any of these risks could negatively affect our results of
operations, cash flows, financial condition and overall growth.
Changes
in our 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 (including as a result of business
acquisitions and dispositions), changes in the valuation of
deferred tax assets and liabilities, accruals related to
unrecognized tax benefits, the results of audits and
examinations of previously filed tax returns and changes in tax
laws. Any of these factors may adversely affect our tax rate and
decrease our profitability. The amount of income taxes we pay is
subject to ongoing audits by U.S. federal, state and local
tax authorities and by
non-U.S. tax
authorities. If these audits result in assessments different
from our unrecognized tax benefits, our future results may
include unfavorable adjustments to our tax liabilities.
We may
not be able to retain or hire key personnel.
To operate successfully and manage potential future growth, the
Company must attract and retain qualified managerial, sales,
technical and other personnel. We face competition for and
cannot assure that we will be able to attract and retain such
qualified personnel. If we lose key personnel or are unable to
hire and retain additional qualified personnel, our business,
financial condition and operating results could be adversely
affected.
Our
inability to protect our intellectual property rights, or our
possible infringement on the proprietary rights of others, and
related litigation could be time consuming and
costly.
We defend our intellectual property rights because unauthorized
copying and sale of our proprietary equipment and consumables
represents a potential loss of revenue to us. From time to time
we also receive notices from others claiming we infringe their
intellectual property rights. The number of these claims may
grow
10
in the future, and responding to these claims may require us to
stop selling or to redesign affected products, or to pay
damages. On November 18, 2004, Omax Corporation
(Omax) filed suit against us alleging that our
products infringe Omaxs patents. The suit also seeks to
have a specific patent we hold declared invalid. Although the
suit seeks damages of over $100 million, we believe
Omaxs claims are without merit and we are contesting
Omaxs allegations of infringement and also vigorously
pursuing our claims against Omax with regard to our own patent.
The outcome of this case is uncertain, and an unfavorable
outcome is reasonably possible. We have and could continue to
spend substantial amounts contesting Omaxs claims and
pursuing our own except as discussed in Note 9:
Commitments and Contingencies to the Consolidated
Financial Statements.
Foreign
currency exchange rates and commodity prices may adversely
affect our results of operations and financial
condition.
We are exposed to a variety of market risks, including the
effects of changes in foreign currency exchange rates and
commodity prices. We have substantial assets, liabilities,
revenues and expenses denominated in currencies other than the
U.S. dollar, and to prepare our consolidated financial
statements, we must translate these items into U.S. dollars
at the applicable exchange rates. In addition, we are a large
buyer of steel, as 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
cannot obtain sufficient quantities of materials, components and
equipment required for our manufacturing activities at
competitive prices and quality and on a timely basis, or if our
manufacturing capacity does not meet demand, 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
businesses purchase their requirements of certain of these items
from sole or limited source suppliers. If we cannot obtain
sufficient quantities of materials, components and equipment at
competitive prices and quality and on a timely basis, we may not
be able to produce sufficient quantities of product to satisfy
market demand, product shipments may be delayed or our material
or manufacturing costs may increase. In addition, because we
cannot always immediately adapt our cost structures to changing
market conditions, our manufacturing capacity may at times
exceed our production requirements or fall short of our
production requirements. Any or all of these problems could
result in the loss of customers, provide an opportunity for
competing products to gain market acceptance and otherwise
adversely affect our business and financial results.
If we
cannot develop technological advancements to 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 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.
Our
reputation and our ability to do business may be impaired by
improper conduct by any of our employees, agents or business
partners.
We cannot provide assurance that our internal controls will
always protect us from reckless or criminal acts committed by
our employees, agents or business partners that would violate
U.S. and/or
non-U.S. laws,
including the laws governing payments to government officials,
competition, money laundering and data privacy. Any such
improper actions could subject us to civil or criminal
investigations in the U.S. and in other jurisdictions,
could lead to substantial civil or criminal, monetary and
non-monetary penalties against us or our subsidiaries, and could
damage our reputation.
11
Risks
Related to Ownership of Our Common Stock
The
price of our common stock may be volatile.
The market price of our common stock may be influenced by many
factors, many of which are beyond our control, including those
described above under Risk Related to our Industry and
Business and the following:
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|
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|
|
fluctuations in general economic conditions;
|
|
|
|
demand for ultrahigh-pressure pumps and ultrahigh-pressure
systems generally;
|
|
|
|
fluctuations in the capital budgets of customers; and
|
|
|
|
development of superior products and services by our
competitors.
|
In the past, our operating results have fluctuated significantly
from quarter to quarter and may continue to do so in the future
due to the factors above and others that are disclosed elsewhere
in this Annual Report. Our operating results may in some future
quarter fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock
could decline significantly. In addition, factors within our
control, such as our ability to deliver equipment in a timely
fashion, have caused our operating results to fluctuate in the
past and may affect us similarly in the future.
The factors listed above may affect both our
quarter-to-quarter
operating results as well as our long-term success. Given the
fluctuations in our operating results, you should not rely on
quarter-to-quarter
comparisons of our results of operations as an indication of our
future performance or to determine any trend in our performance.
Fluctuations in our quarterly operating results could cause the
market price of and demand for our common stock to fluctuate
substantially.
We
have outstanding options, and restricted stock units that have
the potential to dilute the return of our existing common
shareholders and cause the price of our common stock to
decline.
We have granted stock options to our employees and other
individuals. At April 30, 2008, we had options outstanding
to purchase 773,500 shares of our common stock, at exercise
prices ranging from $5.71 to $12.13 per share. In addition, we
have compensation plans with certain employees which granted
those employees common stocks or restricted stock units totaling
296,773 shares in fiscal year 2008.
Washington
law and our charter documents may make an acquisition of us more
difficult.
Provisions in Washington law and in our articles of
incorporation, bylaws, and rights plan could make it more
difficult for a third-party to acquire us, even if doing so
would benefit our shareholders. These provisions:
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Establish a classified board of directors so that not all
members of our board are elected at one time;
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Authorize the issuance of blank check preferred
stock that could be issued by our board of directors (without
shareholder approval) to increase the number of outstanding
shares (including shares with special voting rights), each of
which could hinder a takeover attempt;
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|
Provide for a Preferred Share Rights Purchase Plan or
poison pill;
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|
Impose restrictions on certain transactions between a
corporation and certain significant shareholders.
|
|
|
|
Provide that directors may be removed only at a special
meeting of shareholders and provide that only directors may call
a special meeting;
|
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|
Require the affirmative approval of a merger, share exchange
or sale of substantially all of the Corporations assets by
2/3
of the Corporations shares entitled to vote; and
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|
|
Provide for 60 day advance notification for shareholder
proposals and nominations at shareholder meetings.
|
12
Risks
Related to the Pending Omax Transaction
Our
proposed merger with Omax Corporation (Omax) may
fail to close or there could be substantial delays and costs
before the merger is completed, including the loss of the
$6 million consideration paid for the exclusive option to
purchase Omax.
On December 4, 2007, we entered into an option agreement
that provides us with a period of exclusivity to negotiate the
acquisition of Omax. The proposed transaction is subject to due
diligence, the negotiation of a mutually acceptable definitive
agreement and other customary closing conditions, including
approval of the merger under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the HSR Act). On
July 10, 2008, in connection with the pending merger with
Omax referred to in Note 17, the Federal Trade Commission
(FTC) accepted an Agreement Containing Consent Order
(the proposed consent order) that will remedy
competitive concerns about the proposed transaction alleged in
the FTCs simultaneously issued Complaint. The proposed
consent order is subject to a 30 day public notice and
comment period, following which the FTC will decide whether to
make it final. The Company is permitted to close the transaction
prior to the expiration of the 30 day public notice and
comment period; however, the Company does not anticipate that
other closing conditions of the transaction will be satisfied
prior to such time. Furthermore, there can be no assurances that
a mutually acceptable definitive agreement will be negotiated
and that all other closing conditions will be satisfied and that
the Omax merger will be consummated.
If the
proposed merger with Omax is not closed, the continuation of the
litigation could be time consuming and costly.
If the proposed transaction is consummated, the patent
litigation between the parties, Omax
Corporation v. Flow International Corporation, United
States District Court, Western Division at Seattle, Case
No. CV04-2334,
will be terminated without any additional amounts being paid in
settlement. If the transaction is not closed, the litigation may
continue which could be time consuming and costly.
Our
proposed merger with Omax may result in dilution to our existing
shareholders.
Under the Option Agreement, 3.75 million shares of common
stock (or if the Closing Share Price is less than $9.00, such
greater number as is necessary so that the value of the shares
delivered is $33.75 million) would be issued at closing and
up to 1,733,334 additional shares of common stock based on the
Average Share Price for the six months ending twenty four months
after closing. The additional shares to be delivered will be
determined using a sliding scale as follows: if the average
share price is $13 or less, no additional shares are delivered;
if the average share price is $15 or more, 1,733,334 shares
will be delivered; provided that if the Closing Share Price at
the time the transaction is consummated is less than $9.00, the
additional shares will be reduced by the equivalent shares
attributable to the difference between $9.00 and the Closing
Share Price. These additional shares issued in connection with
the merger with Omax will have a dilutive impact on the number
of our shares outstanding and may also adversely affect the
prevailing market price of our common stock. If more than
3.75 million shares are to be delivered, the Company has
the right to deliver cash in the amount of the value of the
shares rather than shares.
We may
not be able to successfully integrate Omax into our existing
business.
If the transaction is closed, there will be a significant risk
relating to integration. The integration of Omax will be a time
consuming and expensive process and may disrupt the combined
companys operations if it is not completed in a timely and
efficient manner. If this integration effort is not successful,
the combined companys results of operations could be
harmed, employee morale could decline, key employees could
leave, and customers could cancel existing orders or choose not
to place new ones. In addition, the combined company may not
achieve anticipated synergies or other benefits of the merger.
If the anticipated benefits of the merger are not realized or do
not meet the expectations of financial or industry analysts, the
market price of the Companys common stock may decline.
13
We may
assume unknown liabilities in the merger with Omax that could
harm our financial condition and operating
results.
The due diligence that we have and will be able to perform
before the proposed merger may be limited and may not be
sufficient to identify before the closing all possible breaches
of representations and warranties. As a result, we may, among
other things, assume unknown liabilities not disclosed by the
seller or uncovered during pre-merger due diligence. These
obligations and liabilities could harm our financial condition
and operating results. Our rights to indemnification for
breaches of representations and warranties will, except in
certain limited circumstances, be limited to a maximum of
$13.2 million.
We may
incur significant indebtedness following the merger, which could
adversely affect our liquidity.
In order to finance a portion of the cash consideration, we will
incur additional indebtedness. As a result of this indebtedness,
demands on our cash resources will increase, which could affect
our liquidity and, therefore, could have important effects on an
investment in our common stock. For example, while the impact of
this increased indebtedness is expected to be addressed by the
combined cash flows of the Company and Omax, the increased level
of indebtedness could nonetheless create competitive
disadvantages for us compared to other companies with lower debt
levels.
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|
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.
We occupied approximately 394 thousand square feet of floor
space on April 30, 2008 for manufacturing, warehousing,
engineering, administration and other productive uses, of which
approximately 49% was located in the United States.
The following table provides a summary of the floor space by
segment:
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Owned
|
|
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Leased
|
|
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|
(In square feet)
|
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|
North America Waterjet
|
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|
51,600
|
|
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|
140,000
|
|
Asia Waterjet
|
|
|
72,521
|
|
|
|
23,772
|
|
Other International Waterjet
|
|
|
|
|
|
|
52,377
|
|
Applications
|
|
|
|
|
|
|
53,320
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
124,121
|
|
|
|
269,469
|
|
|
|
|
|
|
|
|
|
|
We have operations at the following locations:
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North America Waterjet Kent, Washington,
which is our headquarters and the primary ultrahigh-pressure
pump manufacturing facility and Jeffersonville, Indiana, a
manufacturing facility;
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Asia Waterjet Yokohama and Nagoya, Japan;
Shanghai, QuangChou and Beijing, China; Incheon, Korea; and
Hsinchu, Taiwan, a manufacturing facility;
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Other International Waterjet Bretten,
Germany; Birmingham, England; Milan, Italy; Madrid, Spain; Lyon,
France; Czech Republic; Sao Paulo, Brazil; and Buenos Aires;
Argentina;
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|
Applications Burlington, Canada, which was
the principle manufacturing facility of our Application systems
and which management has made a strategic decision to close in
fiscal year 2009.
|
We believe that our principal properties are adequate for our
present needs and, supplemented by planned improvements and
construction, expect them to remain adequate for the foreseeable
future.
14
|
|
Item 3.
|
Legal
Proceedings
|
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. 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 with defending claims
are expensed as incurred. As of April 30, 2008, we have
recorded 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.
Omax Corporation (Omax) filed suit against us on
November 18, 2004. The case, Omax Corporation v.
Flow International Corporation, United States District
Court, Western Division at Seattle,
Case No. CV04-2334,
was filed in federal court in Seattle, Washington. The suit
alleges that our products infringe Omaxs Patent Nos.
5,508,596 entitled Motion Control with
Precomputation and 5,892,345 entitled Motion Control
for Quality in Jet Cutting. The suit also seeks to have
our Patent No. 6,766,216 entitled Method and System
for Automated Software Control of Waterjet Orientation
Parameters declared invalid, unenforceable and not
infringed. We have brought claims against Omax alleging certain
of their products infringe our Patent No. 6,766,216. Omax
manufactures waterjet equipment that competes with our
equipment. Both the Omax and our patents are directed at the
software that controls operation of the waterjet equipment.
Although the Omax suit seeks damages of over $100 million,
we believe Omaxs claims are without merit and we intend
not only to contest Omaxs allegations of infringement but
also to vigorously pursue our claims against Omax with regard to
our own patent. The outcome of this case is uncertain and an
unfavorable outcome ranging from $0 to $100 million is
reasonably possible. We have spent, and could continue to spend,
significant amounts on this case except as disclosed in
Note 17: Pending Omax Transaction of the Notes to
the Consolidated Financial Statements.
In litigation arising out of a June 2002 incident at a Crucible
Metals (Crucible) facility, our excess
insurance carrier notified us in December 2006 that it would
contest its obligation to provide coverage for the property
damage. We believe the carriers position is without merit
and following the commencement of a declaratory judgment action,
the carrier agreed to provide us a defense. The carrier has
reserved its right to contest coverage at a future date,
however. The unresolved claims relating to this incident total
approximately $7 million and we may spend substantial
amounts if the carrier chooses, at a future date, to withdraw
its defense or contest coverage. We intend to vigorously contest
this claim; however, the ultimate outcome or likelihood of this
specific claim cannot be determined at this time and an
unfavorable outcome is reasonably possible.
In June 2007, we received a claim seeking the return of amounts
paid by Collins and Aikman Corporation, a customer, as
preference payments. The amount sought as preference payments is
approximately $1 million. We intend to vigorously contest
this claim; however, the ultimate outcome or likelihood of this
specific claim cannot be determined at this time and an
unfavorable outcome ranging from $0 to $1 million is
reasonably possible.
Other Legal Proceedings For matters other
than Omax, Crucible, and Collins and Aikman described above, we
do not believe these proceedings will have a material adverse
effect on our consolidated financial position, results of
operations, or cash flows. See Note 9: Commitments and
Contingencies of the Notes to the Consolidated Financial
Statements for a description of our product liability claims and
litigation.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended April 30, 2008
through the solicitation of proxies or otherwise.
15
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.
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|
Fiscal Year 2008
|
|
|
Fiscal Year 2007
|
|
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|
Low
|
|
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High
|
|
|
Low
|
|
|
High
|
|
|
First Quarter
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|
$
|
9.23
|
|
|
$
|
13.34
|
|
|
$
|
12.53
|
|
|
$
|
16.74
|
|
Second Quarter
|
|
|
7.65
|
|
|
|
9.76
|
|
|
|
10.60
|
|
|
|
14.68
|
|
Third Quarter
|
|
|
7.22
|
|
|
|
10.05
|
|
|
|
9.75
|
|
|
|
12.41
|
|
Fourth Quarter
|
|
|
7.34
|
|
|
|
10.45
|
|
|
|
10.43
|
|
|
|
12.97
|
|
Holders
of the Companys Common Stock
As of July 3, 2008, there were approximately 782 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 new senior credit agreement
which was signed on June 9, 2008. Refer to Note 19:
Subsequent Events to the Consolidated Financial
Statements for further discussion on this credit facility.
Issuer
Purchases of Equity Securities
On October 25, 2007, in a privately negotiated transaction,
we repurchased 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 our previously announced
program to repurchase up to $45 million of our securities.
The Warrants were repurchased at a price of $7.43 per Warrant
for an aggregate purchase price of $3 million. Third Point
was the last holder of warrants issued in the PIPE Transaction;
all other warrants had been converted. See Note 10:
Shareholders Equity of the Notes to the
Consolidated Financial Statements for further discussion of this
transaction.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information about the Companys equity compensation plans
as of April 30, 2008 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
773,500
|
|
|
$
|
10.53
|
|
|
|
1,403,154
|
|
For more detailed information regarding the Companys
equity compensation plans, see Note 11:
Stock-based
Compensation of the Notes to our Consolidated Financial
Statements.
16
Comparison
of Five-Year Cumulative Total Shareholder Return*
The graph below compares the cumulative
5-year total
return of holders of Flow International Corporations
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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/03
|
|
|
4/04
|
|
|
4/05
|
|
|
4/06
|
|
|
4/07
|
|
|
4/08
|
Flow International Corporation
|
|
|
|
100.00
|
|
|
|
|
217.95
|
|
|
|
|
505.98
|
|
|
|
|
1155.56
|
|
|
|
|
994.87
|
|
|
|
|
857.26
|
|
S&P Smallcap 600
|
|
|
|
100.00
|
|
|
|
|
139.94
|
|
|
|
|
154.54
|
|
|
|
|
203.05
|
|
|
|
|
218.58
|
|
|
|
|
198.81
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
134.18
|
|
|
|
|
134.93
|
|
|
|
|
165.79
|
|
|
|
|
181.16
|
|
|
|
|
173.24
|
|
Dow Jones US Industrial Machinery
|
|
|
|
100.00
|
|
|
|
|
128.97
|
|
|
|
|
137.21
|
|
|
|
|
116.45
|
|
|
|
|
121.38
|
|
|
|
|
137.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The stock price performance included in this graph is not
necessarily indicative of future stock price performance. |
Performance
Graph Assumptions
|
|
|
|
|
Assumes a $100 investment in our common stock and in each index
in April 30, 2003 and tracks it through to April 30,
2008.
|
|
|
|
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 Company has restated its previously issued Consolidated
Financial Statements for the fiscal years ended April 30,
2007 and 2006 as described in Note 20 to the accompanying
Consolidated Financial Statements included in Item 8. All
affected amounts included herein have been restated.
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,
|
|
|
|
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
2005(1)(2)
|
|
|
2004(1)(2)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
|
$
|
202,658
|
|
|
$
|
169,289
|
|
|
$
|
128,488
|
|
Income (Loss) From Continuing Operations
|
|
|
21,911
|
|
|
|
4,022
|
|
|
|
7,047
|
|
|
|
(12,772
|
)
|
|
|
(10,557
|
)
|
Net Income (Loss)
|
|
|
22,354
|
|
|
|
3,755
|
|
|
|
6,677
|
|
|
|
(21,197
|
)
|
|
|
(11,274
|
)
|
Basic Income (Loss) Per Share From Continuing Operations
|
|
|
0.59
|
|
|
|
0.11
|
|
|
|
0.20
|
|
|
|
(0.72
|
)
|
|
|
(0.68
|
)
|
Basic Net Income (Loss) Per Share
|
|
|
0.60
|
|
|
|
0.10
|
|
|
|
0.19
|
|
|
|
(1.19
|
)
|
|
|
(0.73
|
)
|
Diluted Income (Loss) Per Share From Continuing Operations
|
|
|
0.58
|
|
|
|
0.11
|
|
|
|
0.19
|
|
|
|
(0.72
|
)
|
|
|
(0.68
|
)
|
Diluted Net Income (Loss) Per Share
|
|
|
0.59
|
|
|
|
0.10
|
|
|
|
0.18
|
|
|
|
(1.19
|
)
|
|
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital (Deficit)
|
|
$
|
56,126
|
|
|
$
|
43,108
|
|
|
$
|
41,857
|
|
|
$
|
6,154
|
|
|
$
|
(8,757
|
)
|
Total Assets
|
|
|
151,155
|
|
|
|
123,172
|
|
|
|
119,301
|
|
|
|
118,467
|
|
|
|
129,272
|
|
Short-Term Debt
|
|
|
2,095
|
|
|
|
7,188
|
|
|
|
3,247
|
|
|
|
13,443
|
|
|
|
48,727
|
|
Long-Term Obligations, net
|
|
|
2,333
|
|
|
|
2,779
|
|
|
|
3,774
|
|
|
|
5,704
|
|
|
|
38,081
|
|
Shareholders Equity (Deficit)
|
|
|
86,064
|
|
|
|
61,224
|
|
|
|
56,557
|
|
|
|
29,464
|
|
|
|
(8,217
|
)
|
|
|
|
(1) |
|
Our consolidated statements of operations for fiscal years 2007
through 2004 have been recast to reflect the results of
operations of our CIS Technical Solutions division as
discontinued operations. |
|
(2) |
|
Our consolidated statements of operations for fiscal years 2005
and 2004 have been recast to give effect to the sale of the
Avure Business and present the results for the Avure Business as
discontinued operations. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
We have restated our previously issued Consolidated Financial
Statements for the fiscal years ended April 30, 2007 and
2006, as described in Note 20 to the accompanying
Consolidated Financial Statements included in Item 8.
Note 18 details the impact of the restatement on our
previously reported unaudited quarterly financial data for
interim periods in 2008 and 2007. All affected amounts and
period-to-period comparisons described herein have been restated
accordingly.
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and
accompanying notes included elsewhere in this
Form 10-K.
Our MD&A includes the following major sections:
|
|
|
|
|
Executive Summary
|
|
|
|
Results of Operations
|
18
|
|
|
|
|
Liquidity and Capital Resources
|
|
|
|
Contractual Obligations
|
|
|
|
Off Balance Sheet Arrangements
|
|
|
|
Critical Accounting Policies and Estimates
|
|
|
|
Recently Issued Accounting Pronouncements
|
|
|
|
Factors Affecting Future Operating Results
|
Executive
Summary
Our objective is to deliver profitable dynamic growth by
providing technologically advanced waterjet cutting and cleaning
systems to our customers. To achieve this objective, we offer
versatile waterjet cutting and industrial cleaning systems and
we strive to:
|
|
|
|
|
expand market share in our current markets;
|
|
|
|
continue to identify and penetrate new markets;
|
|
|
|
capitalize on the our customer relationships and business
competencies;
|
|
|
|
develop and market innovative products and applications; and
|
|
|
|
continue to improve operating margins by focusing on operational
improvements.
|
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 under
Item 1A: Risk Factors.
Certain factors may cause our results to vary year over year.
For the three years ended April 30, 2008, we have
identified such factors as follows:
Introduction
of New Products
In fiscal year 2007, we introduced the 87,000 psi intensifier
pump at the bi-annual International Manufacturing Technology
Show (IMTS) in September 2006.
In fiscal year 2006, we introduced the
Nanojettm
system. This system was used in the semiconductor industry to
cut flash memory chips and contributed to 3%, 14% and 28% of
sales in the Asia Waterjet segment sales in fiscal years 2008,
2007 and 2006, respectively. Our 55,000 psi Husky pump used in
cleaning applications and our
Stonecraftertm
machine were also introduced in fiscal year 2006.
Intercompany
Transfer Pricing Policy
We updated our intercompany transfer pricing policy effective
August 1, 2007 to ensure that transactions among our
various subsidiaries involved in various aspects of our business
were made on arms length terms. While the application of
our new intercompany transfer pricing policy did not change our
revenue or operating performance on a consolidated basis, it
impacted the allocation of operating profit amongst our
segments. The impact of the new transfer pricing methodology on
segment revenues and operating performance will be discussed in
the comparative discussion of fiscal year 2008 to fiscal year
2007 results of operations.
Allocation
of Corporate Management Fees
During fiscal year 2008, we have allocated corporate management
fees in total of $5.2 million from North America
Waterjet to the Companys other operating segments which is
part of the reports evaluated by the chief operating decision
maker during the current fiscal year. Fiscal year 2007 has been
recast to reflect this methodology. We have not recast the
results of operations of fiscal year 2006 as doing so would not
be practical.
19
Exit
or Disposal Activities
In April 2008, we decided to sell our CIS Technical Solutions
division (CIS division), which was previously
reported as part of our Applications segment. Accordingly, we
have recast all periods presented to reflect the results of
operating this division in discontinued operations. Operating
income for this division totaled $673,000, $654,000, and
$342,000 for the years ended April 30, 2008, 2007 and 2006,
respectively.
On June 2, 2008, we committed to a plan to establish a
single facility for designing and building our advanced waterjet
systems at our Jeffersonville, Indiana facility and to close our
manufacturing facility in Burlington, Ontario, Canada. We
estimate that the costs associated with the closure of the
Burlington facility and the costs associated with moving
production to our Jeffersonville facility will range from
$2.6 million to $2.8 million in fiscal 2009, including
from $1.5 million to $1.7 million for severance and
termination benefits and $1 million to $1.2 million
for facility closure and relocation costs. Based on our plans to
close our Burlington, Ontario manufacturing facility we recorded
an impairment charge of $97,000 related to the impairment of
long-lived assets in accordance with Statement of Financial
Accounting Standard No. 144 (FAS 144),
Accounting for the Impairment or Disposal of Long-Lived
Assets.
Results
of Operations
Summary
Consolidated Results for Fiscal Years 2008, 2007, and
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
% Change 2008
|
|
% Change 2007
|
|
|
2008
|
|
2007
|
|
2006
|
|
Versus 2007
|
|
Versus 2006
|
|
|
(In thousands, except per share amounts)
|
|
Sales
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
|
$
|
202,658
|
|
|
|
14
|
%
|
|
|
5
|
%
|
Operating Income
|
|
|
16,779
|
|
|
|
4,657
|
|
|
|
20,271
|
|
|
|
260
|
%
|
|
|
(77
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2008
|
|
|
% Change 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Versus 2007
|
|
|
Versus 2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
|
|
$
|
176,755
|
|
|
$
|
155,463
|
|
|
$
|
150,323
|
|
|
|
14
|
%
|
|
|
3
|
%
|
Consumable parts
|
|
|
67,504
|
|
|
|
57,972
|
|
|
|
52,335
|
|
|
|
17
|
%
|
|
|
11
|
%
|
Total Sales
|
|
|
244,259
|
|
|
|
213,435
|
|
|
|
202,658
|
|
|
|
14
|
%
|
|
|
5
|
%
|
Fiscal
year 2008 compared to fiscal year 2007
Sales growth of $30.8 million or 14% was primarily driven
by increased adoption of waterjet cutting and cleaning
technology in the global markets and increased sales of 87,000
psi systems. The strengthening of the Brazilian Real versus the
U.S. dollar improved our competitive position in Latin
America markets. Excluding the impact of foreign currency
changes, sales increased $20.2 million or 10% in 2008.
Total system sales were up $21.3 million or 14%. Excluding
sales to the aerospace industry and Applications segment, system
sales increased 22%. Consumable parts sales increased
$9.5 million or 16% due to the increased installed base of
systems and improved parts availability as well as the use of
Flowparts.com and Floweuropeparts.com, our easy-to-use internet
order entry systems. Flowparts.com has been deployed in the
United States for three years and Floweuropeparts.com has been
deployed in Europe for approximately two years.
Operating income growth was primarily driven by the higher sales
discussed above along with lower operating expenses related to
the timing of new product launches. In the prior year, we
incurred expenses related to new core product development such
as
Stonecraftertm,
the 87,000 psi pump and the 55,000 psi Husky. Additionally,
there were lower professional fees for legal, audit, and
consulting fees for assistance with Sarbanes-Oxley compliance
during the current fiscal year.
20
Fiscal
year 2007 compared to fiscal year 2006
Sales growth was due to managements focus on the core of
our business ultrahigh-pressure water pumps and the
applications that integrate these pumps to cut and clean
material. Improved global awareness of the benefits of waterjet
cutting and cleaning technology over other traditional methods
has resulted in increased global adoption of waterjet cutting
and cleaning technology across multiple industries.
Operating income in fiscal year 2007 was negatively impacted by
increased material and warranty costs, and the compensation
expense incurred to amend the former CEOs employment
contract. Additionally, fiscal year 2007 operating expenses
included legal, consulting fees, and losses totaling
$3 million related to the Asia investigations which were
discussed in previous filings. These investigations related to
irregularities discovered in our Taiwan and Korean operations.
In response to the investigations findings, we developed a
remediation plan which has been implemented by senior management
with the advice and counsel of the Audit Committee and its
advisors. The remediation plan involved rebuilding the Flow Asia
organization; including actions to assure clear and
comprehensive policies, establish and communicate behavior
standards and assure appropriate tone at the top.
Segment
Results of Operations
We operate in four reportable segments, which are North America
Waterjet, Asia Waterjet, Other International Waterjet and
Applications. This section provides a comparison of net sales
and operating expenses for each of our segments for the last
three fiscal years. For further discussion on our business
segments, refer to Note 16: Business Segments and
Geographic Information of the Consolidated Financial
Statements.
North
America Waterjet Segment
Our North America Waterjet segment includes sales and expenses
related to our cutting and cleaning systems using
ultrahigh-pressure water pumps as well as parts and services to
sustain these installed systems in our North America business
units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2008
|
|
|
% Change 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Versus 2007
|
|
|
Versus 2006
|
|
|
|
(In thousands)
|
|
|
Sales
|
|
$
|
130,556
|
|
|
$
|
119,147
|
|
|
$
|
109,686
|
|
|
|
10
|
%
|
|
|
9
|
%
|
% of total company sales
|
|
|
53
|
%*
|
|
|
56
|
%*
|
|
|
54
|
%*
|
|
|
NM
|
|
|
|
NM
|
|
Gross Margin
|
|
|
61,250
|
|
|
|
52,683
|
|
|
|
54,132
|
|
|
|
19
|
%
|
|
|
(3
|
)%
|
Gross Margin as % of sales
|
|
|
47
|
%
|
|
|
44
|
%
|
|
|
50
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
21,978
|
|
|
|
22,947
|
|
|
|
18,899
|
|
|
|
(4
|
)%
|
|
|
21
|
%
|
Research and Engineering
|
|
|
7,667
|
|
|
|
7,955
|
|
|
|
6,061
|
|
|
|
(4
|
)%
|
|
|
31
|
%
|
Gain on Barton Sale
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
NM
|
|
|
|
NM
|
|
General and Administrative
|
|
|
21,620
|
|
|
|
24,702
|
|
|
|
27,298
|
|
|
|
(12
|
)%
|
|
|
(10
|
)%
|
Total Operating Expenses
|
|
$
|
51,265
|
|
|
$
|
55,604
|
|
|
$
|
49,758
|
|
|
|
(8
|
)%
|
|
|
12
|
%
|
Operating Income (Loss)
|
|
$
|
9,985
|
|
|
$
|
(2,921
|
)
|
|
$
|
4,374
|
|
|
|
NM
|
|
|
|
NM
|
|
NM = Not Meaningful
|
|
|
* |
|
Total sales in our North America Waterjet segment include sales
to customers who reside outside the United States |
21
Fiscal
year 2008 compared to fiscal year 2007
In fiscal year 2008:
Sales increased $11.4 million or 10% over the prior year
and constituted 53% of total sales primarily due to the
following:
|
|
|
|
|
Increased market awareness and adoption of waterjet technology
and the positive market reception to our 87,000 psi high
pressure pump.
|
|
|
|
Strong demand for our spare parts due to increased number of
systems in service.
|
The positive factors above were offset by a $7.3 million or
36% decrease in aerospace sales over the prior year due to
delayed aerospace contract awards.
Gross margin for the year ended April 30, 2008 amounted to
$61.3 million or 47% of sales compared to
$52.7 million or 44% of sales in the prior year. Generally,
comparison of gross margin rates will vary period over period
based on changes in our product sales mix and prices, which
includes advanced systems, standard systems and consumables and
levels of production volume. Margins in our North America
Waterjet segment increased on improved product pricing and
higher intercompany prices charged to foreign subsidiaries.
Operating expense changes consisted of the following:
|
|
|
|
|
A reduction in sales and marketing expenses of $969,000 or 4%
primarily as a result of a lower customer support costs driven
by lower aerospace sales when compared to the prior year;
|
|
|
|
A reduction in research and engineering costs of $288,000 or 4%
related to the timing of new product launches. The prior year
comparative period included engineering expenses to support new
core product development such as
Stonecraftertm,
the 87,000 psi pump, and the 55,000 psi pump; and
|
|
|
|
A reduction in general and administrative expenses of
$3.1 million or 12% primarily attributable to lower
professional fees for legal, audit and Sarbanes Oxley compliance
costs which were $5.4 million in fiscal year 2008 compared
to $8.6 million in the prior year.
|
Fiscal
year 2007 compared to fiscal year 2006
In fiscal year 2007:
Sales increased $9.5 million or 9% over fiscal year 2006
primarily due to the following:
|
|
|
|
|
Increasing demand for our standard shapecutting systems and
spare parts due to increased awareness of waterjet cutting
technology and investments in awareness campaign and tradeshows.
|
Aerospace sales decreased $484,000 or 2% from $20.8 million
in fiscal year 2006 to $20.3 million in fiscal year 2007
due to delayed aerospace contract awards.
Gross margin for the year ended April 30, 2007, was
$52.7 million or 44% of sales compared to
$54.1 million or 50% of sales in the prior year. Margins in
North America declined from the prior year due to higher
material prices and warranty costs, and lower average margins on
aerospace systems due to lower volume.
Operating expense changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $4 million
or 21% which stemmed from increased investment in sales and
marketing staff and higher tradeshow expenses due to our
attendance at the
bi-annual
International Manufacturing Technology Show held in Chicago in
September 2006;
|
|
|
|
An increase of $1.9 million or 31% in research and
engineering expenses attributable to additional engineering
resources to support the development of new core products such
as
Stonecraftertm,
the 87,000 psi pump, and the 55,000 psi pump; and
|
22
|
|
|
|
|
A decrease of $2.6 million or 10% in general and
administrative expenses attributable to lower incentive
compensation expenses in fiscal year 2007 primarily as a result
of a $1.2 million reversal of previously accrued
compensation costs related to our Long-term Incentive Plan
(LTIP). Additionally, fiscal year 2006 also included costs for
the termination of the Key Executive Retention Plan of $899,000
and higher incentive compensation expenses under an annual
incentive plan in fiscal year 2006.
|
Asia
Waterjet Segment
Our Asia Waterjet segment includes sales and expenses related to
selling activities of our cutting and cleaning systems using
ultrahigh-pressure water pumps as well as parts and services to
sustain these installed systems in our Asia-Pacific business
units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2008
|
|
|
% Change 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Versus 2007
|
|
|
Versus 2006
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
30,739
|
|
|
$
|
30,845
|
|
|
$
|
36,264
|
|
|
|
(0.3
|
)%
|
|
|
(15
|
)%
|
% of total company sales
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
18
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Gross Margin
|
|
|
13,789
|
|
|
|
17,497
|
|
|
|
21,598
|
|
|
|
(21
|
)%
|
|
|
(19
|
)%
|
Gross Margin as % of sales
|
|
|
45
|
%
|
|
|
57
|
%
|
|
|
60
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
5,171
|
|
|
|
4,771
|
|
|
|
4,478
|
|
|
|
8
|
%
|
|
|
7
|
%
|
Research and Engineering
|
|
|
440
|
|
|
|
686
|
|
|
|
585
|
|
|
|
(36
|
)%
|
|
|
17
|
%
|
General and Administrative
|
|
|
4,630
|
|
|
|
7,239
|
|
|
|
1,943
|
|
|
|
(36
|
)%
|
|
|
273
|
%
|
Total Operating Expenses
|
|
$
|
10,241
|
|
|
$
|
12,696
|
|
|
$
|
7,006
|
|
|
|
(19
|
)%
|
|
|
81
|
%
|
Operating Income
|
|
$
|
3,548
|
|
|
$
|
4,801
|
|
|
$
|
14,592
|
|
|
|
(26
|
)%
|
|
|
(67
|
)%
|
NM = Not Meaningful
Fiscal
year 2008 compared to fiscal year 2007
In fiscal year 2008:
Sales decreased $106,000 or 0.3% over the prior year and
constituted 13% of total sales due to a slowdown in sales to the
semiconductor industry.
Gross margin for the year ended April 30, 2008 amounted to
$13.8 million or 45% of sales compared to
$17.5 million or 57% of sales in the prior year. Margins in
Asia Waterjet segment declined due to changes in our product mix
including lower sales to the semiconductor industry and higher
intercompany transfer pricing in the current year.
Operating expense changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $400,000 or 8% as
a result of increased investment in sales staff;
|
|
|
|
A reduction in research and engineering costs of $246,000 or 36%
due to reduced product development costs related to advanced
systems; and
|
|
|
|
A reduction in general and administrative expenses of
$2.6 million or 36% attributable to lower legal and
consulting expenses including a $475,000 benefit from an
insurance recovery related to the theft in our Korean operation.
Prior year general and administrative expenses included Asia
investigation expenses.
|
23
Fiscal
year 2007 compared to fiscal year 2006
In fiscal year 2007:
Sales decreased $5.4 million or 15% due to the impact of
the management disruption of the Asia investigations and a
slowdown in sales to the semiconductor industry.
Gross margin for the year ended April 30, 2007 was
$17.5 million or 57% of sales compared to
$21.6 million or 60% of sales in the prior year. Margins in
Asia Waterjet segment declined due to changes in our product mix
including lower sales to the semiconductor industry.
Operating expense changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $293,000 or 7%
due to increased staffing;
|
|
|
|
An increase in research and engineering expenses of $101,000 or
17% attributable to increased investment in product
development; and
|
|
|
|
An increase in general and administrative expenses of
$5.3 million or 273% attributable to legal and consulting
fees as well as theft losses incurred in relation to the Asia
investigations in fiscal year 2007 as well as the allocation of
management fees to this reporting segment.
|
Other
International Waterjet
Our Other International Waterjet segment includes sales and
expenses related to selling activities of our cutting and
cleaning systems using ultrahigh-pressure water pumps as well as
parts and services to sustain these installed systems in our
Europe and South America business units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2008
|
|
|
% Change 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Versus 2007
|
|
|
Versus 2006
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
67,804
|
|
|
$
|
49,674
|
|
|
$
|
38,653
|
|
|
|
36
|
%
|
|
|
29
|
%
|
% of total company sales
|
|
|
28
|
%
|
|
|
23
|
%
|
|
|
19
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Gross Margin
|
|
|
24,192
|
|
|
|
18,992
|
|
|
|
13,745
|
|
|
|
27
|
%
|
|
|
38
|
%
|
Gross Margin as % of sales
|
|
|
36
|
%
|
|
|
38
|
%
|
|
|
36
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
13,047
|
|
|
|
9,995
|
|
|
|
9,286
|
|
|
|
31
|
%
|
|
|
8
|
%
|
Research and Engineering
|
|
|
405
|
|
|
|
440
|
|
|
|
469
|
|
|
|
(8
|
)%
|
|
|
(6
|
)%
|
General and Administrative
|
|
|
5,055
|
|
|
|
3,575
|
|
|
|
2,374
|
|
|
|
41
|
%
|
|
|
51
|
%
|
Total Operating Expenses
|
|
$
|
18,507
|
|
|
$
|
14,010
|
|
|
$
|
12,129
|
|
|
|
32
|
%
|
|
|
16
|
%
|
Operating Income
|
|
$
|
5,685
|
|
|
$
|
4,982
|
|
|
$
|
1,616
|
|
|
|
14
|
%
|
|
|
208
|
%
|
NM = Not Meaningful
Fiscal
year 2008 compared to fiscal year 2007
In fiscal year 2008:
Sales increased $18.1 million or 36% over the prior year
and constituted 28% of total sales. This increase was primarily
as a result of stronger demand for our standard shapecutting
systems and spare parts as well as the benefit of a favorable
currency impact based on a stronger Euro and Brazilian Real
versus the U.S. dollar.
Gross margin for the year ended April 30, 2008 amounted to
$24.2 million or 36% of sales compared to $19 million
or 38% of sales in the prior year. The comparative percentage
margin decline is attributable to higher intercompany transfer
pricing as a result of the policy implemented in fiscal year
2008.
24
Operating expense changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $3.1 million
or 31% as a result of increased staffing, higher commissions on
increased system sales and the impact of a stronger Euro and
Brazilian Real versus US Dollar;
|
|
|
|
A reduction in research and engineering costs of $35,000 or
8%; and
|
|
|
|
An increase in general and administrative expenses of
$1.5 million or 41% attributable to higher management fee
allocation in the current year when compared to the prior year.
|
Fiscal
year 2007 compared to fiscal year 2006
In fiscal year 2007:
Sales increased $11 million or 29% primarily as a result of
stronger demand for our standard shapecutting systems and spare
parts revenue as well as the benefit of a stronger Euro versus
U.S. dollar.
Gross margin for the year ended April 30, 2007 was
$19 million or 38% of sales compared to $13.7 million
or 36% of sales in the prior year. Gross margin improvements in
Other International Waterjet are attributable to strong product
pricing, improved product mix, and a stronger Euro versus
U.S. Dollar exchange rate.
Operating expense changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $709,000 or 8%
due to increased staffing;
|
|
|
|
A decrease in research and engineering expenses of $29,000 or
6%; and
|
|
|
|
An increase in general and administrative expenses of
$1.2 million or 51% attributable to the allocation of
management fees to this reporting segment.
|
Applications
Segment
Our Applications segment offers specialty engineered robotic
systems designed for material removal and separation of various
materials and for factory automation. Effective September 2007,
our Applications segment ceased the pursuit of sales of
non-waterjet automation systems and focused on increasing
revenue from systems that integrate waterjet cutting technology.
In April 2008, we decided to sell our CIS Technical Solutions
division which provided technical services to improve the
productivity of automated assembly lines and was previously
presented as part of our Applications segment. Technical
services provided by this division include robot programming,
process improvement, systems integration and production support.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
% Change 2008
|
|
|
% Change 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Versus 2007
|
|
|
Versus 2006
|
|
|
|
(In thousands)
|
|
|
Sales
|
|
$
|
15,160
|
|
|
$
|
13,769
|
|
|
$
|
18,055
|
|
|
|
10
|
%
|
|
|
(24
|
)%
|
% of total company sales
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Gross Margin
|
|
|
1,377
|
|
|
|
1,736
|
|
|
|
3,678
|
|
|
|
(21
|
)%
|
|
|
(53
|
)%
|
Gross Margin as % of sales
|
|
|
9
|
%
|
|
|
13
|
%
|
|
|
20
|
%
|
|
|
NM
|
|
|
|
NM
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
2,076
|
|
|
|
1,765
|
|
|
|
1,010
|
|
|
|
18
|
%
|
|
|
75
|
%
|
Research and Engineering
|
|
|
259
|
|
|
|
302
|
|
|
|
175
|
|
|
|
(14
|
)%
|
|
|
73
|
%
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
1,236
|
|
|
|
NM
|
|
|
|
NM
|
|
General and Administrative
|
|
|
2,583
|
|
|
|
1,739
|
|
|
|
1,387
|
|
|
|
49
|
%
|
|
|
25
|
%
|
Total Operating Expenses
|
|
$
|
4,918
|
|
|
$
|
3,806
|
|
|
$
|
3,808
|
|
|
|
29
|
%
|
|
|
0.1
|
%
|
Operating Loss
|
|
$
|
(3,541
|
)
|
|
$
|
(2,070
|
)
|
|
$
|
(130
|
)
|
|
|
71
|
%
|
|
|
NM
|
|
Results of Discontinued Operations, net of Tax of $230, $236,
and $124
|
|
$
|
443
|
|
|
$
|
418
|
|
|
$
|
218
|
|
|
|
6
|
%
|
|
|
92
|
%
|
NM = Not Meaningful
25
Fiscal
year 2008 compared to fiscal year 2007
In fiscal year 2008:
Sales increased $1.4 million or 10% over the prior year and
constituted 6% of total sales. This increase was primarily as a
result of the benefit of a favorable foreign currency impact
based on prior year average Canadian Dollar exchange rates.
Gross margin for the year ended April 30, 2008 amounted to
$1.4 million or 9% of sales compared to $1.7 million
or 13% of sales in the prior year. The comparative percentage
margin decline is attributable to expenses mainly as a result of
inventory write-downs of $399,000 and severance costs of
$234,000 incurred related to the cessation of the pursuit of
non-waterjet automation systems.
Operating expenses and changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $311,000 or 18%
primarily due to bad debt expenses of $413,000 during the
current year offset by a decrease in staffing costs during the
current fiscal year;
|
|
|
|
A reduction in research and engineering costs of $43,000 or
14%; and
|
|
|
|
An increase in general and administrative expenses of $844,000
or 49% attributable to higher management fee allocation in the
current year when compared to the prior year as well as
severance expenses incurred during the current fiscal year.
Additionally, based on our plans to close our Burlington,
Ontario manufacturing facility in order to establish a single
facility for designing and building advanced systems in
Jeffersonville, Indiana, we recorded an impairment charge of
$97,000 related to the impairment of long-lived assets in
accordance with Statement of Financial Accounting Standard
No. 144 (FAS 144), Accounting for
the Impairment or Disposal of Long-Lived Assets.
|
Fiscal
year 2007 compared to fiscal year 2006
Sales decreased $4.3 million or 24% over the prior year and
constituted 7% of total sales. The decrease was due to an
economic downturn in the domestic automotive industry. To
counteract this market issue, we shifted our sales focus to
systems that integrate waterjet cutting technology and
deemphasized non-waterjet systems in non-automotive markets.
Gross margin for the year ended April 30, 2007 amounted to
$1.7 million or 13% of compared to $3.7 million or 20%
of sales in the prior year. The comparative percentage margin
decline is mainly as a result of increased cost of certain
automotive contracts during the first and second fiscal quarters
of fiscal year 2007.
Operating expenses and changes consisted of the following:
|
|
|
|
|
An increase in sales and marketing expenses of $755,000 or 75%
primarily due to bad debt expenses and investment in additional
staff to focus on non-automotive applications;
|
|
|
|
An increase in research and engineering costs of $127,000 or 73%
as a result of new product development; and
|
|
|
|
An increase in general and administrative expenses of $352,000
or 25% attributable to management fee allocation.
|
Other
(Income) Expense
Interest
Income and Interest Expense
Our interest income over the last three years was:
|
|
|
|
|
$780,000 in fiscal year 2008;
|
|
|
|
$838,000 in fiscal year 2007; and
|
|
|
|
$405,000 in fiscal year 2006
|
26
The moderate decrease in interest income in fiscal year 2008
when compared to fiscal year 2007 results from a moderate
decline in average cash balances during fiscal year 2008 while
the increase in fiscal year 2007 when compared to fiscal year
2006 was primarily as a result of an increase in average
invested cash balances in fiscal year 2007.
Our Interest Expense over the last three years was:
|
|
|
|
|
$419,000 in fiscal year 2008;
|
|
|
|
$409,000 in fiscal year 2007; and
|
|
|
|
$1.7 million in fiscal year 2006
|
Interest expense remained unchanged in fiscal year 2008 when
compared to fiscal year 2007. The significant decrease in
interest expense when compared to fiscal year 2006 was due to
the reduction of our Senior Debt.
Other
Income (Expense), Net
Our other Income (Expense), net in the Consolidated Statement of
Operations is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net Realized Foreign Exchange Gains
|
|
$
|
1,759
|
|
|
$
|
213
|
|
|
$
|
19
|
|
Net Unrealized Foreign Exchange Gains (Losses)
|
|
|
(2,904
|
)
|
|
|
1,827
|
|
|
|
55
|
|
Premium on Repurchase of Warrants
|
|
|
(629
|
)
|
|
|
|
|
|
|
|
|
Hedging Costs
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
Other
|
|
|
(72
|
)
|
|
|
88
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,846
|
)
|
|
$
|
1,922
|
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2008, we recorded Other Expense, Net of
$1.8 million compared to Other Income, Net of
$1.9 million and $310,000 in fiscal years 2007 and 2006,
respectively. These changes result from the fluctuation in
realized and unrealized foreign exchange gains and losses as
shown in the table above.
Income
Taxes
Our (benefit)/provision for income taxes for our continuing
operations over the last three years was:
|
|
|
|
|
$(6.6) million in fiscal year 2008
|
|
|
|
$3.0 million in fiscal year 2007
|
|
|
|
$5.4 million in fiscal year 2006
|
Under FASB Statement No. 109, Accounting for Income
Taxes, we recognize a net deferred tax asset for items that
will generate a reduction in future taxable income to the extent
that it is more likely than not that these deferred
assets will be realized. A valuation allowance is provided when
it is more likely than not that some portion or all of a
deferred tax asset will not be realized. The ultimate
realization of deferred tax assets depends on the generation of
future taxable income during the period in which the tax benefit
will be realized. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to
taxable income in the years in which the tax benefit will be
realized. In determining the realizability of these assets, we
considered numerous factors, including historical profitability,
estimated future taxable income and the industry in which we
operate. Based on the cumulative results of operations in the
United States for the fiscal years ended April 30, 2008,
2007, and 2006 and anticipated future profit levels, we believe
that certain of our deferred tax assets are more likely than not
to be realized. Accordingly, in the fiscal year ended
April 30, 2008, we reversed approximately
$17.2 million of valuation allowance against deferred tax
assets related to U.S. net operating loss (NOL)
carryforwards and other net deferred tax assets, which will more
likely than
27
not, be realized in future periods. Additionally, during the
first quarter of fiscal year 2008, after concluding that certain
of our German deferred tax assets were more likely than not to
be realized, we reversed approximately $1 million of
valuation allowance related to net operating loss carryforwards
and other net deferred tax assets in this jurisdiction. At
April 30, 2008, the recorded amount of our deferred tax
assets was $10 million, net of valuation allowance on
certain foreign NOLs.
Our foreign tax provision consists of current and deferred tax
expense. The United States tax provision consists of current and
deferred tax expense (benefit), state taxes and foreign
withholding taxes. We do not permanently defer undistributed
earnings of certain foreign subsidiaries. In the current year we
repatriated $9.8 million, net of $885,000 withholding tax
from these foreign subsidiaries and we plan to continue
repatriating additional funds in the future. We recorded a
$304,000 liability for withholding taxes payable on future
repatriation of these foreign earnings.
In fiscal year 2007, 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 $517,000 liability for withholding taxes payable on
future repatriation of foreign earnings in fiscal year 2007. In
fiscal year 2007, we repatriated $8.0 million, net of tax
of $1.4 million from two foreign subsidiaries.
The fiscal year 2006 tax provision consisted of current and
deferred expense related to operations in foreign jurisdictions
which were profitable, primarily in Taiwan and Germany. In
addition, operations in certain jurisdictions (principally
Canada and the United States) reported net operating losses for
which no tax benefit was recognized as it was more likely than
not that such benefit will not be realized at that time. In
fiscal year 2006, we repatriated $1.4 million from certain
foreign subsidiaries.
Fourth
Quarter Highlights
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
%
|
|
|
|
(In thousands except per share amounts)
|
|
|
Sales
|
|
$
|
63,274
|
|
|
$
|
52,256
|
|
|
$
|
11,018
|
|
|
|
21
|
%
|
Income (Loss) from Continuing Operations
|
|
|
13,310
|
|
|
|
(3,371
|
)
|
|
|
16,681
|
|
|
|
NM
|
|
Basic Income (Loss) per Share from Continuing Operations
|
|
$
|
0.35
|
|
|
$
|
(0.09
|
)
|
|
|
NM
|
|
|
|
NM
|
|
Diluted Income (Loss) per Share from Continuing Operations
|
|
$
|
0.35
|
|
|
$
|
(0.09
|
)
|
|
|
NM
|
|
|
|
NM
|
|
NM = Not Meaningful
|
|
|
|
|
Sales in the fourth quarter of fiscal year 2008 increased by
$11 million or 21% when compared to the prior year same
period
|
|
|
|
Income from continuing operations was $13.3 million or $.35
per basic and dilutive income per share for the quarter ended
April 30, 2008 compared to a loss from continuing
operations of $3.4 million or $.09 per basic and dilutive
share in the prior year comparative period.
|
The largest contributing factors to the improvement in sales
were increased adoption of waterjet cutting and cleaning
technology in the global markets and increased sales of 87,000
psi systems. The strengthening of the Brazilian Real versus the
U.S. dollar improved our competitive position in Latin
America markets. Excluding the impact of foreign currency
changes, sales increased $7 million or 13% in the fourth
quarter of fiscal year 2008 when compared to the prior year same
period.
Operating income growth was primarily driven by the higher sales
discussed above along with lower operating expenses due to
decreases in corporate expenses including patent and legal fees
related to Omax as litigation related expenditure has been
stayed while the Company pursues the merger with Omax. Lower
28
operating expenses were also driven by lower professional fees
related to audit and audit-related service fees and consulting
fees which were $1.2 million in the fourth quarter of
fiscal year 2008 compared to $4.1 million in the prior year
same period. The fourth quarter of fiscal year 2007 also
included $2.9 million of expenses related to compensation
expenses to amend the former CEOs employment contract.
Income from continuing operations also includes a net deferred
tax benefit of $11.8 million resulting from the changes in
our deferred tax assets in fiscal year 2008, as well as the
reversal of our U.S. valuation allowance in the fourth
quarter of fiscal year 2008 following the conclusion that it was
more likely than not that our U.S. net operating loss (NOL)
carryforwards and other net deferred tax assets will be realized
in future periods.
Liquidity
and Capital Resources
Cash
Flow Summary
The following table summarizes our cash flows from operating,
investing and financing activities for the periods noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net Income
|
|
$
|
22,354
|
|
|
$
|
3,755
|
|
|
$
|
6,677
|
|
Noncash charges (credits) to income
|
|
|
4,419
|
|
|
|
6,349
|
|
|
|
15,891
|
|
Changes in working capital
|
|
|
(12,802
|
)
|
|
|
(5,906
|
)
|
|
|
(1,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,971
|
|
|
|
4,198
|
|
|
|
20,743
|
|
Net cash provided by (used in) investing activities
|
|
|
(12,926
|
)
|
|
|
(7,679
|
)
|
|
|
10,889
|
|
Net cash provided by (used in) financing activities
|
|
|
(7,598
|
)
|
|
|
5,723
|
|
|
|
(6,662
|
)
|
Effect of foreign exchange rate changes on cash and
|
|
|
|
|
|
|
|
|
|
|
|
|
cash equivalents
|
|
|
(2,636
|
)
|
|
|
(128
|
)
|
|
|
(1,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(9,189
|
)
|
|
|
2,114
|
|
|
|
23,198
|
|
Cash and cash equivalents at beginning of period
|
|
|
38,288
|
|
|
|
36,174
|
|
|
|
12,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash balance
|
|
$
|
29,099
|
|
|
$
|
38,288
|
|
|
$
|
36,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Cash generated by operating activities before the effects of
changes in working capital was $26.8 million in fiscal year
2008 compared to $10.1 million in fiscal year 2007. This
increase was mainly attributable to the increase in net earnings
and an increase in noncash benefits for deferred income taxes as
a result of the valuation allowance release on U.S. net
operating loss carryforwards, an increase in depreciation and
amortization expense and inventory write-downs in fiscal year
2008 as well as an increase in unrealized foreign exchange
losses in the current fiscal year. Cash generated by operating
activities before the effects of changes in working capital was
$22.6 million in fiscal year 2006. The decrease in fiscal
year 2007 when compared to fiscal year 2006 was primarily due to
lower net income. Fiscal year 2006 also included a noncash
adjustment of $6.9 million related to a fair value
adjustment on warrants issued which increased the cash generated
from operating activities in that year.
Changes in our working capital resulted in a net
$12.8 million use of cash in fiscal year 2008 compared to
$5.9 million use of cash in fiscal year 2007. Accounts
receivable increased by $6.1 million as a result of
increases in our net sales; inventories increased by
$2.9 million in order to meet the increased demand for our
products as well as longer lead times quoted by our suppliers;
customer deposits decreased by $1.7 million due to the
timing of contract awards. The $4.1 million increase of
cash used for working capital in fiscal year 2007 when compared
to fiscal year 2006 was mainly attributable to decreases in
operating liabilities as a result of timing of vendor payments
offset by a significant reduction in accounts receivable.
29
Investing
Activities
Net cash used in investing activities was $12.9 million in
fiscal year 2008 compared to $7.7 million in fiscal year
2007. The increase in net cash used primarily resulted from
payments of $7.5 million for the pending merger with Omax.
For a detailed discussion on the pending merger, see
Note 17: Pending Omax Transaction of our Notes to
the Consolidated Financial Statements. In fiscal 2006, we
generated $10.9 million of cash from investing activities
mainly as a result of cash consideration received from the sale
of certain of our non-core businesses; Avure Technologies
Incorporated, Flow International FPS AB, Avure Technologies AB
subsidiaries, and our 51% interest in Flow Autoclave Systems
(together, the Avure Business).
Financing
Activities
Net cash used in financing activities was $7.6 million
during in fiscal year 2008 compared to net cash provided by
financing activities of $5.7 million during the prior year.
The increase in net cash used in financing activities was mainly
due to the repayment of notes payable of $5.3 million in
fiscal year 2008 that was borrowed at the end of fiscal year
2007, the repurchase of warrants of $3 million, and a
reduction of $1.3 million of net cash provided from the
exercise of stock options during fiscal year 2008 when compared
to fiscal year 2007. The $6.7 million use of cash in
financing activities in fiscal year 2006 was primarily
attributable to cash payments on our subordinated debt.
Debt
We have an outstanding seven-year collateralized long-term
variable rate loan, expiring in 2011, bearing interest at an
annual rate of 3.67% as of April 30, 2008. The loan is
collateralized by our manufacturing facility in Taiwan. The
outstanding balance of $2.9 million at April 30, 2008
is included in Long-term Obligations.
We also have four unsecured credit facilities in Taiwan with a
commitment totaling $6.5 million at April 30, 2008,
bearing interest at rates ranging from 2.56% to 2.76% per annum.
In April 2007, we borrowed $5.3 million against this
facility for the repatriation of earnings. This amount was
repaid in the first quarter of fiscal year 2008. At
April 30, 2008, all the credit facilities will mature
within one year and the balance outstanding under these credit
facilities amounts to $1.1 million, which is shown under
Notes Payable in the Consolidated Financial Statements.
Warrant
Repurchase
In October 25, 2007, in a privately negotiated transaction,
we purchased from certain funds managed or advised by Third
Point LLC (collectively, Third Point) outstanding
warrants that gave Third Point the right until March of 2010 to
purchase 403,300 of the Companys common stock at an
exercise price of $4.07 per share (the Warrants).
Third Point purchased the Warrants, together with shares of
commons stock, our March 2005 Private Investment Public
Equity transaction (the PIPE Transaction). The
Warrants were repurchased from Third Point in connection with
our previously announced program to repurchase up to
$45 million of the Companys securities. The Warrants
were repurchased at a price of $7.43 per Warrant for an
aggregate purchase price of $3 million. See Note 10:
Shareholders Equity of the Notes to the
Consolidated Financial Statements for a detailed discussion of
this transaction.
Sources
of Liquidity
Funds generated by operating activities, available cash and cash
equivalents, and our credit facilities continue to be our most
significant sources of liquidity. At April 30, 2008, we had
total cash of $29.1 million, of which approximately
$15 million was held by divisions outside the United
States. The repatriation of offshore cash balances from certain
divisions will trigger tax liabilities. In fiscal 2008, we
repatriated $9.8 million, net of tax of $885,000 from three
foreign subsidiaries and we plan to continue repatriating
additional funds in future from these foreign subsidiaries. We
repatriated $8.0 million of earnings in fiscal year 2007,
net of tax of $1.4 million from two foreign subsidiaries.
30
Our domestic senior credit agreement (Credit
Agreement) is our primary source of external funding.
Effective July 19, 2007, we entered into a Second Amendment
(the Amendment) to our Credit Agreement, which
increased our revolving line of credit from $30 million to
$45 million and permitted the use of the line of credit for
the repurchase of stock. The amended credit agreement bore
interest at the banks prime rate (5.00% at April 30,
2008) or was linked to LIBOR plus a percentage depending on
our leverage ratios, at our option. The agreement set forth
specific financial covenants to be attained on a quarterly
basis, which we believed, based on our financial forecasts, were
achievable. At April 30, 2008, we had $42.8 million of
domestic unused line of credit available, net of
$2.2 million in outstanding letters of credit. The extended
credit line was expected to provide us with liquidity that could
be used to make acquisitions or fund the repurchase of shares.
We were in compliance with all financial covenants as of
April 30, 2008
On June 9, 2008, we signed a new five-year senior secured
credit facility with an aggregate principal amount of
$100 million, which includes a $65 million revolving
credit facility and a $35 million term loan that we may
draw upon for the merger with Omax. This line of credit has a
maturity date of June 9, 2013 and is collateralized by a
general lien on all of our material assets, as defined within
the credit agreement. Borrowings on the credit facility, if any,
will be based on the banks prime rate or LIBOR rate plus a
percentage spread depending on current leverage ratios, at our
option. Refer to Note 19: Subsequent Events of the
Notes to the Consolidated Financial Statements for a detailed
discussion of this transaction.
Our capital spending plans currently provide for outlays of
approximately $8.2 million over the next twelve months,
primarily related to information technology spending and
facility improvement. It is expected that funds necessary for
these expenditures will be generated internally. Our capital
spending for fiscal year ended April 30, 2008 and 2007
amounted to $6.3 million and $6.9 million,
respectively.
We believe that our existing cash, cash from operations, and
credit facilities at April 30, 2008 are adequate to fund
our operations for at least the next twelve months.
Disclosures
about Contractual Obligations and Commercial
Commitments
The following table summarizes our known future payments
pursuant to certain contracts as of April 30, 2008 and the
estimated timing thereof. More detail about our contractual
obligations and commercial commitments are in Note 7:
Long-term Obligations and Note 9: Commitments and
Contingencies of the Notes to the Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Fiscal Year
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating Leases
|
|
$
|
2,821
|
|
|
$
|
2,480
|
|
|
$
|
2,249
|
|
|
$
|
1,719
|
|
|
$
|
1,078
|
|
|
$
|
588
|
|
|
$
|
10,935
|
|
Long-term Debt, Notes Payable & Capital Leases(1)
|
|
|
2,094
|
|
|
|
984
|
|
|
|
930
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
4,426
|
|
Purchase Commitments(2)
|
|
|
17,771
|
|
|
|
6,522
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,293
|
|
License Agreements
|
|
|
352
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
704
|
|
Consulting Agreements
|
|
|
123
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
Liabilities related to Unrecognized Tax benefits, including
Interest and Penalties(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,190
|
|
|
|
9,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,161
|
|
|
$
|
10,342
|
|
|
$
|
9,179
|
|
|
$
|
2,137
|
|
|
$
|
1,078
|
|
|
$
|
9,778
|
|
|
$
|
55,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt obligations are exclusive of interest. |
|
(2) |
|
Purchase obligations include agreements to purchase goods or
services that are enforceable, are legally binding and specify
all significant terms, including fixed or minimum quantities to
be purchased; fixed, minimum or variable price provisions; and
the approximate timing of the transaction. Purchase obligations
do not include agreements that are cancelable without penalty.
Additionally, although they are not legally binding agreements,
open purchase orders are included in the table above.
Substantially all open purchase |
31
|
|
|
|
|
orders are fulfilled within 30 days. The amount presented
above as inventory purchases include all open purchase orders.
We expect to fund these commitments with existing cash and our
cash flows from operations in future periods. |
|
(3) |
|
We have unrecognized tax benefits of $9.2 million
associated with uncertain tax positions as of April 30,
2008. 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
We do not have off-balance sheet arrangements, financing or
other relationships with unconsolidated entities or other
persons. At April 30, 2008, there were no off-balance sheet
arrangements.
Critical
Accounting Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the
U.S. The preparation of these consolidated financial
statements requires us to make 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
the accounting policies, assumptions, estimates, and judgments
to ensure that our consolidated financial statements are
presented fairly. However, because future events cannot be
determined with certainty, actual results may differ from our
assumptions and estimates, and such differences could be
material.
Our significant accounting policies are discussed in
Note 1: The Company and Summary of Significant
Accounting Policies of the Notes to the Consolidated
Financial Statements. Management believes that the following
accounting estimates require managements most difficult,
subjective or complex judgment, resulting from the need to make
estimates about the effect of matters that are inherently
uncertain and are the most critical to aid in fully
understanding and evaluating our reported consolidated financial
results.
Revenue
Recognition
We recognize revenue for sales of ultrahigh-pressure waterjet
pumps, consumables, services, and billing for freight charges,
in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB 104),
Revenue Recognition in Financial Statements and EITF
Issue
No. 00-21
(EITF 00-21),
Revenue Arrangements with Multiple Deliverables.
Additionally, because
FlowMastertm
software, our PC-based waterjet control, is essential to the
functionality of our waterjet systems, we recognize revenue on
sales of waterjet systems in accordance with Statement of
Position
97-2
(SOP 97-2),
Software Revenue Recognition. Specifically, 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. Generally, sales revenue is recognized at the
time of shipment, receipt by customer, or, if applicable, upon
completion of customer acceptance provisions.
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.
For those arrangements with multiple elements, the arrangement
is divided into separate units of accounting if certain criteria
are met, including whether the delivered item has stand-alone
value to the customer and whether there is vendor specific
objective and reliable evidence of the fair value of the
undelivered items. 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. The amount
32
allocable to a delivered item is limited to the amount that we
are entitled to bill and collect and is not contingent upon the
delivery/performance of additional items. 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.
For complex aerospace and automation systems designed and
manufactured to buyers specification, the Company
recognizes revenues using the percentage of completion method in
accordance with Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Typical lead times can
range from two to 18 months. Sales and profits on such
contracts are recorded based on the ratio of total actual
incurred costs to date to the total estimated costs for each
contract (the cost-to-cost method). Losses on
contracts are recognized in the period in which they are
determined. The impact of revisions of contract estimates is
recognized as a cumulative change in estimate in the period in
which the revisions are made.
The complexity of the estimation process and judgments related
to the assumptions, risks and uncertainties inherent with the
application of the percentage-of-completion method of accounting
affect the amounts of revenue and related expenses reported in
our consolidated financial statements. A number of internal and
external factors can affect our estimates, including labor
rates, utilization, changes to specification and testing
requirements and collectibility of unbilled receivables.
Significant management judgments and estimates are made in
connection with the revenues recognized in any accounting
period. We must assess whether the fee associated with a revenue
transaction is fixed or determinable, whether or not collection
is probable, whether VSOE exists for all elements of a
transaction or multiple-element arrangement and the related
revenue recognition impact of this and, for fixed-price
contracts, make estimates of costs to complete. Material
differences could result in the amount and timing of revenues
for any period if management were to make different judgments or
utilize different estimates.
Valuation
of Obsolete/Excess Inventory
We currently write-down obsolete or excess parts and equipment
inventory that is no longer used due to design changes to our
products or lack of customer demand. We regularly monitor our
inventory levels and, if we identify an excess condition based
on our usage, we record a corresponding inventory reserve which
establishes a new cost basis for our inventory. Subsequent
changes in facts or circumstances do not result in the reversal
of previously recorded markdowns or an increase in that newly
established cost basis. The amount of inventory write-down
requires the use of management judgment regarding technological
obsolescence and forecasted customer demand. If estimates
regarding consumer demand are inaccurate or changes in
technology affect demand for certain products in an unforeseen
manner, we may be exposed to losses that could be material.
Valuation
of Deferred Tax Assets and Uncertain Tax Positions
We account for uncertain tax positions in accordance with FASB,
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the
minimum recognition threshold a tax position is required to meet
before being recognized in the consolidated financial
statements. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (Step 1) occurs when
an enterprise concludes that a tax position, based solely on its
technical merits, is more likely than not to be sustained upon
examination. Measurement (Step 2) is only addressed if Step
1 has been satisfied. Under Step 2, the tax benefit is measured
at the largest amount of benefit, determined on a cumulative
probability basis that is more likely than not to be realized
upon settlement. As used in FIN 48, the term more
likely than not means that the likelihood of an occurrence
is greater than 50%. We adopted FIN 48 as of May 1,
2007. To the extent that we prevail in matters for which
unrecognized tax benefits have been established, or are required
to pay amounts in excess of our unrecognized tax benefits, our
effective tax rate in a given financial statement period could
be materially affected. An unfavorable tax settlement would
require the use of our cash and would result in an increase to
33
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. As of April 30, 2008, we had
approximately $35.4 million of domestic net operating loss
and $36.7 million of state net operating loss carryforwards
to offset certain earnings for federal and state income tax
purposes. These net operating loss carryforwards expire between
fiscal year 2022 and fiscal year 2026. Net operating loss
carryforwards in foreign jurisdictions amount to
$39.3 million. Most of the foreign net operating losses can
be carried forward indefinitely, with certain amounts expiring
between fiscal years 2014 and 2017. The federal, state and
foreign net operating loss carryforwards per the income tax
returns filed include uncertain tax positions taken in prior
years. Due to the application of FIN 48, the net operating
loss carryforwards per the income tax returns are larger than
the net operating loss deferred tax asset recognized for
consolidated financial statement purposes. We also have a
capital loss carryover of $4.3 million which expires in
2011. Utilization of net operating losses may be subject to
limitation due to ownership changes and other limitations
provided by the Internal Revenue code and similar state
provisions. If such a limitation applies, the net operating loss
may expire before full utilization.
Our income tax returns are periodically audited by domestic and
foreign tax authorities. These audits include questions
regarding our filing tax positions, including the timing and
amount of deductions and the allocation of income among various
tax jurisdictions. At any one time, multiple tax years are
subject to audit by the various tax authorities.
Long-lived
Assets and Goodwill
Goodwill and other acquired intangible assets with indefinite
lives are not amortized but are tested for impairment annually,
and when an event occurs or circumstances change such that it is
reasonably possible that impairment may exist. Our annual
testing date is April 30. We test goodwill for impairment
by first comparing the book value of net assets to the fair
value of the related operations. If the fair value is determined
to be less than book value, a second step is performed to
compute the amount of the impairment. In this process, an
implied fair value for goodwill is estimated, based on the fair
value of the operations, and is compared to its carrying value.
The shortfall of the fair value below carrying value represents
the amount of goodwill impairment.
In determining fair value of long-lived assets and whether
impairment has occurred, we are required to estimate future cash
flows and residual values. Key assumptions we use in developing
these estimates include: probability of alternative outcomes;
product pricing; product sales; and discount rate.
We do not believe there is a reasonable likelihood that there
will be a material change in the estimates or assumptions we use
to calculate the fair value of long-lived assets and goodwill.
However, if actual results are not consistent with our estimates
and assumptions used in estimating future cash flows and asset
fair values, we may be exposed to losses that could be material.
Stock-based
compensation
We have a stock-based compensation plan, which provides for the
grant of stock options and restricted stock units. Refer to
Note 1: The Company and Summary of Significant
Accounting Policies, and
34
Note 11: Stock-based Compensation of the Notes
to the Consolidated Financial Statements for a complete
discussion of our stock-based compensation programs.
We determine the fair value of our stock option awards at the
date of grant using the Black-Scholes option-pricing model. We
determine cumulative expense related to performance-based
nonvested awards based on our actual consolidated financial
results to date and estimated future performance as of
period-end.
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. 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 with defending claims
are expensed as incurred. As of April 30, 2008, we have
accrued our estimate of the probable liabilities for the
settlement of these claims. Refer to Note 9: Commitments
and Contingencies of the Notes to the Consolidated Financial
Statements.
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.
Recently
Issued Accounting Pronouncements
A summary of recently issued accounting pronouncements is in
Note 2: Recently Issued Accounting Pronouncements of
the Notes to the Consolidated Financial Statements.
Factors
Affecting Future Operating Results
Looking forward to fiscal year 2009, we believe we are well
positioned for continued success and profitable growth
especially as our 87,000 psi product line continues to be
positively received by the market. However, this positive market
reception will be negatively impacted by the economic slowdown
in North America which could also impact other markets
around the world. The anticipated continued strength of foreign
currencies against the U.S. dollar, particularly the Euro
and Real, is expected to positively impact our business. Recent
contract awards for large aerospace programs are also expected
to positively impact our sales to the aerospace industry over
the next two years.
Our manufacturing operations are prepared to take advantage of
volume leverage and opportunities for cost reduction. On
June 2, 2008, we committed to a plan to establish a single
facility for designing and building our advanced waterjet
systems at our Jeffersonville, Indiana facility and to close our
manufacturing facility in Burlington, Ontario, Canada. We
estimate that the costs associated with the closure of the
Burlington facility and the costs associated with moving
production to its Jeffersonville facility will range from
$2.6 million to $2.8 million in fiscal year 2009,
including from $1.5 million to $1.7 million for
severance and termination benefits and $1 million to
$1.2 million for facility closure and relocation costs.
In fiscal year 2009 and beyond, we intend to remain focused on
our strategies of increasing market awareness of waterjet
technology to drive increased market penetration and to improve
our operational efficiency. We expect that these strategies and
actions taken will help us achieve our long-term goals of
compound annual revenue growth rate of 10% and operating income
annual growth rate of at least 20%.
35
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market risk exists in our financial instruments related to an
increase in interest rates, adverse changes in foreign exchange
rates relative to the U.S. dollar, as well as financial
risk management and derivatives. These exposures are related to
our daily operations.
Interest Rate Exposure At April 30,
2008, we had $4.0 million in interest bearing debt and
notes payable. Of this amount, $2.9 million was variable
rate debt with an interest rate of 3.67% per annum as of
April 30, 2008 and $1.1 million was related to notes
payable at fixed interest rates ranging from 2.56% to 2.76% as
of April 30, 2008. See Note 8: Long-term
Obligations and Notes Payable of the Consolidated Financial
Statements for additional contractual information on our
long-term obligations and notes payable. Market risk is
estimated as the potential for interest rates to increase 10% on
the variable rate debt. A 10% change in variable interest rates
would impact the interest expense in fiscal 2008 by
approximately $12,000, based on the debt balance and interest
rate as of April 30, 2008. At April 30, 2008, 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, 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 47% of consolidated revenue. Based on
our results for the year ended April 30, 2008 for our
foreign subsidiaries, and based on the net position of foreign
assets less liabilities, a hypothetical near-term 10%
appreciation of the U.S. dollar against all foreign
currencies in the countries in which we operate in could
positively impact operating income (expense) and other income
(expense) by $599,000 and $(91,000), respectively. Conversely, a
hypothetical 10% devaluation of the U.S. dollar against all
foreign currencies in the countries in which we operate in could
negatively impact operating income (expense) and other income
(expense) by $(732,000) and $111,000, respectively. Our
consolidated financial position and cash flows could be
similarly impacted. We selectively utilize forward exchange rate
contracts which we have not designated as cash flow hedges to
protect against the adverse effect exchange rate fluctuations
may have on foreign currency denominated accounts receivable and
accounts payable (both trade and inter-company). At
April 30, 2008, we marked these forward contracts to
market, recording a net loss of approximately $118,000 as a
component of net income for the year ended April 30, 2008.
We may continue to utilize forward exchange rate contracts and
other derivative instruments in the future to manage the risk
associated with foreign currency exchange rate changes.
36
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The following consolidated financial statements are filed as a
part of this report:
|
|
|
Index to Consolidated Financial Statements
|
|
Page in this Report
|
|
|
|
38
|
|
|
39
|
|
|
40
|
|
|
41
|
|
|
43
|
|
|
44
|
Financial Statement Schedule
|
|
|
|
|
82
|
37
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, 2008 and 2007, and the
related consolidated statements of operations,
stockholders equity (deficit) and comprehensive income
(loss), and cash flows for each of the three years in the period
ended April 30, 2008. Our audits also included the
financial statement schedule listed in the index at
Item 15. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements and financial
statement schedule 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of April 30, 2008 and 2007, and the results of
its operations and its cash flows for each of the three years in
the period ended April 30, 2008, 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.
As described in Note 1 to the consolidated financial
statements, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 123(R),
Share-Based Payment, effective May 1, 2006.
As discussed in Note 20, the accompanying 2006 and 2007
consolidated financial statements have been restated.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
April 30, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated July 10, 2008, expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Seattle, Washington
July 10, 2008
38
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
(Restated, See
|
|
|
|
2008
|
|
|
Note 20)
|
|
|
|
(In thousands,
|
|
|
|
except share amounts)
|
|
|
ASSETS:
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
29,099
|
|
|
$
|
38,288
|
|
Restricted Cash
|
|
|
142
|
|
|
|
|
|
Short-term Investments
|
|
|
|
|
|
|
750
|
|
Receivables, net
|
|
|
33,632
|
|
|
|
27,329
|
|
Inventories
|
|
|
29,339
|
|
|
|
26,593
|
|
Deferred Income Taxes, net
|
|
|
2,889
|
|
|
|
44
|
|
Deferred Acquisition Costs
|
|
|
7,953
|
|
|
|
|
|
Other Current Assets
|
|
|
6,456
|
|
|
|
7,191
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
109,510
|
|
|
|
100,195
|
|
Property and Equipment, net
|
|
|
18,790
|
|
|
|
15,459
|
|
Intangible Assets, net
|
|
|
4,062
|
|
|
|
3,767
|
|
Goodwill
|
|
|
2,764
|
|
|
|
2,764
|
|
Deferred Income Taxes, net
|
|
|
15,535
|
|
|
|
305
|
|
Other Assets
|
|
|
494
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151,155
|
|
|
$
|
123,172
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
$
|
1,118
|
|
|
$
|
6,366
|
|
Current Portion of Long-Term Obligations
|
|
|
977
|
|
|
|
822
|
|
Accounts Payable
|
|
|
19,516
|
|
|
|
17,715
|
|
Accrued Payroll and Related Liabilities
|
|
|
8,189
|
|
|
|
6,239
|
|
Taxes Payable and Other Accrued Taxes
|
|
|
3,617
|
|
|
|
2,542
|
|
Deferred Income Taxes
|
|
|
686
|
|
|
|
257
|
|
Deferred Revenue
|
|
|
4,980
|
|
|
|
5,136
|
|
Customer Deposits
|
|
|
4,549
|
|
|
|
5,791
|
|
Other Accrued Liabilities
|
|
|
9,753
|
|
|
|
12,219
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
53,385
|
|
|
|
57,087
|
|
Long-Term Obligations, net
|
|
|
2,333
|
|
|
|
2,779
|
|
Deferred Income Taxes
|
|
|
7,787
|
|
|
|
1,371
|
|
Other Long-Term Liabilities
|
|
|
1,586
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,091
|
|
|
|
61,948
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Series A 8% Convertible Preferred Stock
$.01 par value, 1,000,000 shares authorized, none
issued
|
|
|
|
|
|
|
|
|
Common Stock $.01 par value,
49,000,000 shares authorized, 37,589,787 and
37,268,037 shares issued and outstanding at April 30,
2008 and 2007, respectively
|
|
|
371
|
|
|
|
367
|
|
Capital in Excess of Par
|
|
|
139,007
|
|
|
|
139,207
|
|
Accumulated Deficit
|
|
|
(47,584
|
)
|
|
|
(69,395
|
)
|
Accumulated Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
Defined Benefit Plan Obligation, net of income tax of $93 and $67
|
|
|
(280
|
)
|
|
|
(201
|
)
|
Cumulative Translation Adjustment, net of income tax of $764 and
$0
|
|
|
(5,450
|
)
|
|
|
(8,754
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
86,064
|
|
|
|
61,224
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151,155
|
|
|
$
|
123,172
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
39
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated,
|
|
|
(Restated,
|
|
|
|
2008
|
|
|
See Note 20)
|
|
|
See Note 20)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Sales
|
|
$
|
244,259
|
|
|
$
|
213,435
|
|
|
$
|
202,658
|
|
Cost of Sales
|
|
|
142,549
|
|
|
|
122,662
|
|
|
|
109,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
101,710
|
|
|
|
90,773
|
|
|
|
92,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
42,272
|
|
|
|
39,478
|
|
|
|
33,673
|
|
Research and Engineering
|
|
|
8,771
|
|
|
|
9,383
|
|
|
|
7,290
|
|
General and Administrative
|
|
|
33,888
|
|
|
|
37,255
|
|
|
|
33,002
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
1,236
|
|
Gain on Barton Sale
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,931
|
|
|
|
86,116
|
|
|
|
72,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
16,779
|
|
|
|
4,657
|
|
|
|
20,271
|
|
Interest Income
|
|
|
780
|
|
|
|
838
|
|
|
|
405
|
|
Interest Expense
|
|
|
(419
|
)
|
|
|
(409
|
)
|
|
|
(1,673
|
)
|
Fair Value Adjustment on Warrants Issued
|
|
|
|
|
|
|
|
|
|
|
(6,915
|
)
|
Other Income (Expense), net
|
|
|
(1,846
|
)
|
|
|
1,922
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Provision for Income Taxes
|
|
|
15,294
|
|
|
|
7,008
|
|
|
|
12,398
|
|
Benefit (Provision) for Income Taxes
|
|
|
6,617
|
|
|
|
(2,986
|
)
|
|
|
(5,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
21,911
|
|
|
|
4,022
|
|
|
|
7,047
|
|
Income from Operations of Discontinued Operations, Net of Income
Tax of $230, $236, and $612
|
|
|
443
|
|
|
|
418
|
|
|
|
772
|
|
Loss on Sale of Discontinued Operations, Net of Income Tax of
$0, $0 and $334
|
|
|
|
|
|
|
(685
|
)
|
|
|
(1,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
22,354
|
|
|
$
|
3,755
|
|
|
$
|
6,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
.59
|
|
|
$
|
.11
|
|
|
$
|
.20
|
|
Discontinued Operations, Net of Income Tax
|
|
|
.01
|
|
|
|
(.01
|
)
|
|
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
.60
|
|
|
$
|
.10
|
|
|
$
|
.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
.58
|
|
|
$
|
.11
|
|
|
$
|
.19
|
|
Discontinued Operations, Net of Income Tax
|
|
|
01
|
|
|
|
(.01
|
)
|
|
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
.59
|
|
|
$
|
.10
|
|
|
$
|
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
FLOW
INTERNATIONAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated,
|
|
|
(Restated,
|
|
|
|
2008
|
|
|
See Note 20)
|
|
|
See Note 20)
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
22,354
|
|
|
$
|
3,755
|
|
|
$
|
6,677
|
|
Adjustments to reconcile Net Income to Cash Provided by
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
3,974
|
|
|
|
2,981
|
|
|
|
3,373
|
|
Deferred Income Taxes
|
|
|
(10,931
|
)
|
|
|
(970
|
)
|
|
|
1,119
|
|
Excess Tax Benefits from Exercise of Stock Options
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
Premium on Warrant Repurchase
|
|
|
629
|
|
|
|
|
|
|
|
|
|
Fair Value Adjustment on Warrants Issued
|
|
|
|
|
|
|
|
|
|
|
6,915
|
|
Provision for Slow Moving and Obsolete Inventory
|
|
|
1,307
|
|
|
|
46
|
|
|
|
620
|
|
Bad Debt Expense
|
|
|
1,805
|
|
|
|
1,143
|
|
|
|
104
|
|
Warranty Expense
|
|
|
3,589
|
|
|
|
4,306
|
|
|
|
1,691
|
|
Incentive Stock Compensation Expense
|
|
|
695
|
|
|
|
769
|
|
|
|
4,800
|
|
Loss on Sale of Discontinued Operations
|
|
|
|
|
|
|
685
|
|
|
|
1,142
|
|
Unrealized Foreign Currency Losses (Gains), net
|
|
|
2,904
|
|
|
|
(1,827
|
)
|
|
|
(1,939
|
)
|
Gain on Barton Sale
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
Other
|
|
|
746
|
|
|
|
(784
|
)
|
|
|
566
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(6,121
|
)
|
|
|
6,803
|
|
|
|
(4,668
|
)
|
Inventories
|
|
|
(2,894
|
)
|
|
|
(3,727
|
)
|
|
|
(7,640
|
)
|
Other Operating Assets
|
|
|
2,066
|
|
|
|
(344
|
)
|
|
|
825
|
|
Accounts Payable
|
|
|
790
|
|
|
|
(3,972
|
)
|
|
|
2,829
|
|
Accrued Payroll and Related Liabilities
|
|
|
2,027
|
|
|
|
(1,046
|
)
|
|
|
677
|
|
Deferred Revenue
|
|
|
(389
|
)
|
|
|
(1,162
|
)
|
|
|
1,794
|
|
Customer Deposits
|
|
|
(1,671
|
)
|
|
|
(1,779
|
)
|
|
|
2,704
|
|
Other Operating Liabilities
|
|
|
(6,610
|
)
|
|
|
(679
|
)
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities
|
|
|
(13,971
|
)
|
|
|
4,198
|
|
|
|
20,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for Property and Equipment and Intangible Assets
|
|
|
(6,303
|
)
|
|
|
(6,944
|
)
|
|
|
(2,549
|
)
|
Cash Received in Sale of Business, Net of Cash Sold
|
|
|
|
|
|
|
995
|
|
|
|
10,119
|
|
Settlement on Sale of Avure Business
|
|
|
|
|
|
|
(985
|
)
|
|
|
|
|
Purchase of Short-term Investments
|
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
Proceeds from Sale of Short-term Investments
|
|
|
773
|
|
|
|
|
|
|
|
|
|
Payments for Pending Acquisition
|
|
|
(7,508
|
)
|
|
|
|
|
|
|
|
|
Proceeds from Sale of Customer List
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
Proceeds from Sale of Property and Equipment
|
|
|
254
|
|
|
|
5
|
|
|
|
175
|
|
Restricted Cash
|
|
|
(142
|
)
|
|
|
|
|
|
|
496
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in) Investing Activities
|
|
|
(12,926
|
)
|
|
|
(7,679
|
)
|
|
|
10,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
FLOW
INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated,
|
|
|
(Restated,
|
|
|
|
2008
|
|
|
See Note 20)
|
|
|
See Note 20)
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of Notes Payable
|
|
|
(6,616
|
)
|
|
|
(1,614
|
)
|
|
|
(2,274
|
)
|
Borrowings Under Notes Payable
|
|
|
1,106
|
|
|
|
5,823
|
|
|
|
1,729
|
|
Payments on Senior Credit Agreement
|
|
|
|
|
|
|
|
|
|
|
(59,294
|
)
|
Borrowings on Senior Credit Agreement
|
|
|
|
|
|
|
|
|
|
|
49,599
|
|
Payments of Long-Term Obligations
|
|
|
(785
|
)
|
|
|
(931
|
)
|
|
|
(116
|
)
|
Borrowings under Capital Lease Obligations
|
|
|
319
|
|
|
|
|
|
|
|
49
|
|
Payments of Capital Lease Obligations
|
|
|
(101
|
)
|
|
|
(49
|
)
|
|
|
|
|
Proceeds from Exercise of Warrants and Stock Options
|
|
|
1,198
|
|
|
|
2,494
|
|
|
|
4,634
|
|
Excess Tax Benefits from Exercise of Stock Options
|
|
|
291
|
|
|
|
|
|
|
|
|
|
Payments for Warrants Repurchase
|
|
|
(3,010
|
)
|
|
|
|
|
|
|
|
|
Dividends Paid to Joint Venture Partner
|
|
|
|
|
|
|
|
|
|
|
(989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in) Financing Activities
|
|
|
(7,598
|
)
|
|
|
5,723
|
|
|
|
(6,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Changes in Exchange Rates
|
|
|
(2,636
|
)
|
|
|
(128
|
)
|
|
|
(1,772
|
)
|
Increase (Decrease) in Cash And Cash Equivalents
|
|
|
(9,189
|
)
|
|
|
2,114
|
|
|
|
23,198
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
38,288
|
|
|
|
36,174
|
|
|
|
12,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
29,099
|
|
|
$
|
38,288
|
|
|
$
|
36,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid during the Year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
341
|
|
|
$
|
229
|
|
|
$
|
903
|
|
Income Taxes
|
|
|
6,961
|
|
|
|
6,495
|
|
|
|
1,674
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonmonetary exchange of assets
|
|
|
|
|
|
|
250
|
|
|
|
|
|
Issuance of compensatory common stock on executive incentive
compensation plan
|
|
|
|
|
|
|
884
|
|
|
|
799
|
|
Note received in sale of Avure Business
|
|
|
|
|
|
|
|
|
|
|
1,313
|
|
Classification of PIPE warrants to additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
13,611
|
|
Accounts Payable incurred to acquire Property and Equipment, and
Intangible Assets
|
|
|
745
|
|
|
|
961
|
|
|
|
|
|
Accounts Receivable for Warrants and options exercised
|
|
|
|
|
|
|
|
|
|
|
1,086
|
|
Accrued Liabilities incurred for Pending Acquisition
|
|
|
445
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
FLOW
INTERNATIONAL CORPORATION
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Other
|
|
|
Shareholders
|
|
|
|
|
|
|
Par
|
|
|
in Excess
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Value
|
|
|
of Par
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
(Deficit)
|
|
|
|
(In thousands)
|
|
|
Balances, April 30, 2005
|
|
|
33,495
|
|
|
|
335
|
|
|
|
112,512
|
|
|
|
(79,827
|
)
|
|
|
(3,556
|
)
|
|
|
29,464
|
|
Components of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (restated, see Note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,677
|
|
|
|
|
|
|
|
6,677
|
|
Unrealized Loss on Cash Flow Hedges, net of Income Tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(715
|
)
|
|
|
(715
|
)
|
Reclassification Adjustment for Settlement of Cash Flow Hedges,
net of income tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492
|
*
|
|
|
492
|
*
|
Reclassification of Avure Business Cumulative Translation
Adjustment to Income, net of Income Tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,053
|
)
|
|
|
(3,053
|
)
|
Cumulative Translation Adjustment, net of Income Tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,167
|
)
|
|
|
(1,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Warrants & Options
|
|
|
2,925
|
|
|
|
24
|
|
|
|
5,695
|
|
|
|
|
|
|
|
|
|
|
|
5,719
|
|
Reclass Warrant Liability to Capital In Excess of Par
|
|
|
|
|
|
|
|
|
|
|
13,611
|
|
|
|
|
|
|
|
|
|
|
|
13,611
|
|
Stock Compensation (restated, see Note 20)
|
|
|
523
|
|
|
|
5
|
|
|
|
5,519
|
|
|
|
|
|
|
|
|
|
|
|
5,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2006 (restated, see Note 20)
|
|
|
36,943
|
|
|
$
|
364
|
|
|
$
|
137,337
|
|
|
$
|
(73,150
|
)
|
|
$
|
(7,999
|
)
|
|
$
|
56,552
|
|
Cumulative effect of the adoption of 123R (Note 11)
|
|
|
|
|
|
|
|
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
(313
|
)
|
Components of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (restated, see Note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,755
|
|
|
|
|
|
|
|
3,755
|
|
Reclassification Adjustment for Settlement of Cash Flow Hedges,
net of income tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273
|
|
|
|
273
|
|
Cumulative Translation Adjustment, net of Income Tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of the adoption of FAS 158 (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
(201
|
)
|
Exercise of Warrants & Options
|
|
|
168
|
|
|
|
2
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
Stock Compensation (restated, see Note 20)
|
|
|
157
|
|
|
|
1
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2007 (restated, see Note 20)
|
|
|
37,268
|
|
|
$
|
367
|
|
|
$
|
139,207
|
|
|
$
|
(69,395
|
)
|
|
$
|
(8,955
|
)
|
|
$
|
61,224
|
|
Cumulative effect of the adoption of FIN 48 (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(543
|
)
|
|
|
|
|
|
|
(543
|
)
|
Components of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (Note 10)
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The amount includes $448 related to the discontinued operations
and was transferred to the purchaser of Avure Business on
October 31, 2005 (see Note 15). |
The accompanying notes are an integral part of these
consolidated financial statements.
43
Note 1 The
Company and Summary of Significant Accounting
Policies:
Operations
and Segments
Flow International Corporation (Flow or the
Company) designs, develops, manufactures, markets,
installs and services ultrahigh-pressure waterjet technology,
and is a leading provider of robotics and assembly equipment.
Flows ultrahigh-pressure water pumps pressurize water from
40,000 to 87,000 pounds per square inch (psi) and are integrated
with water delivery systems so that water can be used to cut or
clean material. Flows products include both standard and
specialized waterjet cutting and cleaning systems. In addition
to ultrahigh-pressure water systems, the Company provides
automation and articulation systems. The Company provides
technologically-advanced, environmentally-sound solutions to the
manufacturing, industrial and marine cleaning markets.
The Company has identified four reportable segments: North
America Waterjet, Asia Waterjet, Other International Waterjet
(together known as Waterjet) and Applications. See Note 16:
Business Segments and Geographical Information for
detailed information on the reportable segments.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Flow International Corporation and its wholly-owned
subsidiaries. All intercompany transactions and accounts have
been eliminated in consolidation.
Foreign
Currency Translation
The financial statements of foreign subsidiaries have been
measured and translated in accordance with Statement of
Financial Accounting Standards No. 52, Foreign
Currency Translation. The local currency is the functional
currency for all operations outside of the United States. Assets
and liabilities are translated at the exchange rate in effect as
of our balance sheet date. Revenues and expenses are translated
at the average monthly exchange rates throughout the year. The
effects of exchange rate fluctuations in translating assets and
liabilities of international operations into U.S. dollars
are accumulated and reflected as a currency translation
adjustment in the accompanying consolidated statements of
stockholders equity. Transaction gains and losses are
included in net income (loss).
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Goodwill
and Intangible Assets
In accordance with Statement of Financial Accounting Standard
142 (FAS 142), Goodwill and Other
Intangible Assets, the Company does not amortize goodwill
or intangible assets with indefinite lives. Goodwill and
intangible assets with indefinite lives are tested for
impairment at each year end, or more frequently, if a
significant event occurs. Intangible assets with a finite life
are tested for impairment when events or change in circumstances
indicate the carrying value may not be recoverable. To test
goodwill for impairment, the Company compares the fair value of
its reporting units, and, if necessary, the implied fair value
of goodwill, with the corresponding carrying values. If
necessary, the Company records an impairment charge for any
shortfall. The Company determines the fair value of its
reporting units using a discounted cash
44
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
flow model and uses other measures of fair value, such as
purchase prices offered by potential buyers of businesses that
might be sold, if they are viewed as better indicators of fair
value. The Company conducted its annual impairment review of
goodwill as of April 30 and concluded that goodwill was not
impaired for the three-year period ended April 30, 2008.
Intangible assets consist of acquired and internally developed
patents and trademarks. Trademarks have an indefinite life and
are not amortized. The Company capitalizes application fees,
license fees, legal and other costs of successfully defending a
patent from infringement. The remaining costs are expensed as
incurred. Patents are amortized on a straight-line basis over
the legal life of the underlying patents. The weighted average
amortization period for patents is 17 years.
Long-Lived
Assets
In accordance with Statement of Financial Accounting Standard
No. 144 (FAS 144), Accounting for
the Impairment or Disposal of Long-Lived Assets, the
Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amounts of assets may
not be recoverable. The carrying value of long-lived assets is
assessed for impairment by evaluating operating performance and
estimated future undiscounted cash flows of the underlying
assets. If the sum of the expected future net cash flows of an
asset is less than its carrying value, an impairment charge is
recorded to the extent that an assets carrying value
exceeds fair value. The Company recorded an impairment charge of
$97,000 related to the impairment of long-lived assets in fiscal
year 2008 based on its plans to close its Burlington, Ontario
manufacturing facility in order to establish a single facility
for designing and building advanced systems in its
Jeffersonville, Indiana facility. There was no impairment of
long-lived assets for the years ended April 30, 2007 and
2006.
Asset
Retirement Obligations
The Company accounts for asset retirement obligations under
Financial Accounting Standards Board (FASB)
Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143. FIN 47 requires recognition of a
liability for the fair value of a required asset retirement
obligation (ARO) when such obligation is incurred.
The Companys AROs are primarily associated with leasehold
improvements which, at the end of a lease, the Company is
contractually obligated to remove in order to comply with the
lease agreement. At the inception of a lease with such
conditions, the Company records an ARO liability and a
corresponding capital asset in an amount equal to the estimated
fair value of the obligation. The liability is estimated based
on a number of assumptions requiring managements judgment,
including facility closing costs, cost inflation rates and
discount rates, and is accreted to its projected future value
over time. The capitalized asset is depreciated using the
convention for depreciation of leasehold improvement assets.
Upon satisfaction of the ARO conditions, any difference between
the recorded ARO liability and the actual retirement costs
incurred is recognized as an operating gain or loss in the
consolidated statement of earnings.
As of April 30, 2008 and 2007, the Companys
net ARO asset included in Property, plant and
equipment, net was $52,000 and $63,000, respectively,
while the Companys net ARO liability included in
Other
Long-term
Liabilities was $144,000 and $138,000, on the same
respective dates.
Fair
Value of Financial Instruments
For certain of the Companys financial instruments,
including accounts receivable, accounts payable, accrued
expenses, and customer deposits the carrying amounts 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.
45
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivative
Financial Instruments
The Company follows Statement of Financial Accounting Standards
No. 133 (FAS 133), Accounting for
Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts for hedging activities. All derivatives,
whether designated in hedging relationships or not, are required
to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized
in the statement of operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of
cash flow hedges are recognized in earnings.
Certain forecasted transactions and assets are exposed to
foreign currency risk. The Company monitors its foreign currency
exposures regularly to maximize the overall effectiveness of its
foreign currency hedge positions. In fiscal year 2006, the
Company was awarded two aerospace contracts to be paid in Euro.
In order to mitigate the foreign exchange risk between the
U.S. Dollar and the Euro, the Company entered into two
derivative instruments on December 16, 2005 and
March 27, 2006 with total notional amounts of
$7.3 million and $4.4 million, respectively. These
foreign exchange contracts expired at various times through June
2007. In June 2006, the Company was directed by the customer to
suspend, then subsequently to cancel work on these two systems
as a result of changes in the timing and scope of the projects.
The Company consequently cancelled the related hedges and
discontinued hedge accounting in accordance with FAS 133,
and as a result, the Company recorded a total of $206,000 in
Other Expense related to these hedges in its fiscal year 2007.
Derivative losses of $273,000 and $44,000 were reclassified from
OCI into earnings in fiscal year 2007 and 2006, respectively.
Hedge ineffectiveness, determined in accordance with
FAS 133, had no impact on earnings for the years ended
April 30, 2008, 2007, and 2006. No cash flow hedges were
derecognized or discontinued for the year ended April 30,
2008.
Revenue
Recognition
The Company recognizes revenue for sales of ultrahigh-pressure
waterjet pumps, consumables and services, and billing for
freight charges, in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB 104),
Revenue Recognition in Financial Statements and EITF
Issue
No. 00-21
(EITF 00-21),
Revenue Arrangements with Multiple Deliverables..
Additionally, because
FlowMastertm
software is essential to the functionality of the Companys
waterjet systems, the Company recognizes revenue on sales of
waterjet systems in accordance with Statement of Position
97-2
(SOP 97-2),
Software Revenue Recognition. Specifically, 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. Generally, sales revenue is recognized at the
time of shipment, receipt by customer, or, if applicable, upon
completion of customer acceptance provisions.
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.
For those arrangements with multiple elements, the arrangement
is divided into separate units of accounting if certain criteria
are met, including whether the delivered item has stand-alone
value to the customer and whether there is vendor specific
objective and reliable evidence of the fair value of the
undelivered items. 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.
46
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The amount allocable to a delivered item is
limited to the amount that the Company is entitled to bill and
collect and is not contingent upon the delivery/performance of
additional items. 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.
For complex aerospace and automation systems designed and
manufactured to buyers specification, the Company
recognizes revenues using the percentage of completion method in
accordance with Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Typical lead times can
range from two to 18 months. Sales and profits on such
contracts are recorded based on the ratio of total actual
incurred costs to date to the total estimated costs for each
contract (the cost-to-cost method). Losses on
contracts are recognized in the period in which they are
determined. The impact of revisions of contract estimates is
recognized as a cumulative change in estimate in the period in
which the revisions are made.
Shipping revenues and expenses are recorded in revenue and cost
of goods sold, respectively.
Cost
of Sales
Cost of sales is generally recognized when products are shipped
or services are delivered. In the case of waterjet systems, cost
of sales for delivered systems is generally recognized in the
period when the revenue for all or portion of the waterjet
system sale is recognized. Cost of sales includes direct and
indirect costs associated with the manufacture, installation and
service of the Companys systems and consumable parts
sales. Direct costs include material and labor, while indirect
costs include, but are not limited to, depreciation, inbound
freight charges, purchasing and receiving costs, inspection
costs, warehousing costs, internal transfer costs and other
costs of our distribution network.
Advertising
Expense
The Company recognizes advertising expense as incurred including
online and offline costs to promote its brands. For the years
ended April 30, 2008, 2007 and 2006, the advertising
expense was $1,170,000, $1,042,000 and $846,000, respectively.
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.
Short-term
Investments
Investments with original maturities of greater than three
months and remaining maturities of less than one year are
classified as short term investments. Short-term investments are
available-for-sale and are recorded at cost which approximates
fair value.
Inventories
Inventories are stated at the lower of cost, determined by using
the
first-in,
first-out method, or market. Costs included in inventories
consist of materials, labor and manufacturing overhead, which
are related to the purchase or production of inventories.
47
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Depreciation for financial reporting purposes is
provided using the straight-line method over the estimated
useful lives of the assets, which range from three to
11 years for machinery and equipment; three to nine years
for furniture and fixtures and 19 years for buildings.
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.
Income
Taxes
The Company accounts for income taxes under the asset and
liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included in the consolidated financial
statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it
believes these assets will more likely than not be realized. In
making such determination, the Company considers all available
positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax
planning strategies and recent financial operations. In the
event the Company was to determine that it would be able to
realize its deferred income tax assets in the future in excess
of its net recorded amount, the Company would make an adjustment
to the valuation allowance which would reduce the provision for
income taxes.
In July 2006, the FASB issued Financial Interpretation
(FIN) No. 48, Accounting for Uncertainty
in Income Taxes, which clarifies the accounting for
uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN No. 48
provides that a tax benefit from an uncertain tax position may
be recognized when it is more likely than not that the position
will be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on its technical
merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized
upon the adoption of FIN 48 and in subsequent periods. This
interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 was effective for fiscal years beginning after
December 15, 2006.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
on May 1, 2007. As a result of the implementation of
Interpretation 48, the Company recognized approximately a
$543,000 increase in the liability for unrecognized tax
benefits, which was accounted for as an increase to the
May 1, 2007 accumulated deficit balance.
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 related
FIN 48 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
48
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the functional currency of the relevant business unit, and does
not believe there is an associated material credit or financial
statement risk.
Credit risks are mitigated by the diversity of customers in our
customer base across many different geographic regions and
performing creditworthiness analyses on such customers. No
single customer accounted for 10% or more of revenues during any
of the three years ended April 30, 2008. Some of our
customers are contractors to The Boeing Company
(Boeing) and are purchasing from the Company
equipment for certain projects awarded to them by Boeing.
Boeing-related system revenue was $21.6 million in fiscal
year 2006 which was in excess of 10% of the consolidated revenue
due in part to equipment related to the Boeing 787 project
initiated in fiscal year 2005. Boeing-related system revenue was
not in excess of 10% of our consolidated revenue in fiscal years
2008 and 2007. As of April 30, 2008 and 2007, the Company
does not believe that it has any significant concentrations of
credit risk.
Warranty
Liability
Products are warranted to be free from material defects for a
period of 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 for product
returns upon receipt of the returned goods, or, if material, at
the time of notification and approval. In fiscal year 2007, the
term of the product warranty on new standard system sales was
extended from one year to two years for the North America
Segment.
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.
Health
Benefits
The Company is self insured for the cost of employee group
health insurance in the United States. 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).
For the years ended April 30, 2008 and 2007, Plan Cost was
approximately $2.9 million and $2.4 million,
respectively, and the liability, including IBNR, which is
recorded in wages and benefits payable, was $252,000 and
$167,000 as of April 30, 2008 and 2007, respectively.
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
$8.3 million, $8.7 million and $6.7 million for
fiscal year 2008, 2007 and 2006.
49
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Income (Expense), net
Other Income (Expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net Realized Foreign Exchange Gains
|
|
$
|
1,759
|
|
|
$
|
213
|
|
|
$
|
19
|
|
Net Unrealized Foreign Exchange Gains (Losses)
|
|
|
(2,904
|
)
|
|
|
1,827
|
|
|
|
55
|
|
Premium on Repurchase of Warrants
|
|
|
(629
|
)
|
|
|
|
|
|
|
|
|
Hedging Costs
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
Other
|
|
|
(72
|
)
|
|
|
88
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,846
|
)
|
|
$
|
1,922
|
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Income per Share
Basic income per share represents net income available to common
shareholders divided by the weighted average number of shares
outstanding during the period. Diluted income per share
represents net income 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 option and warrants. Potential common stock
equivalents of stock options and warrants are computed by the
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 per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
21,911
|
|
|
$
|
4,022
|
|
|
$
|
7,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income per share weighted
average shares
|
|
|
37,421
|
|
|
|
37,192
|
|
|
|
34,676
|
|
Dilutive potential common shares from employee stock options
|
|
|
147
|
|
|
|
333
|
|
|
|
230
|
|
Dilutive potential common shares from warrants
|
|
|
|
|
|
|
270
|
|
|
|
1,371
|
|
Dilutive potential common shares from stock compensation plans
|
|
|
325
|
|
|
|
73
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income per share weighted
average shares and assumed conversions
|
|
|
37,893
|
|
|
|
37,868
|
|
|
|
36,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share from continuing operations
|
|
$
|
.59
|
|
|
$
|
.11
|
|
|
$
|
.20
|
|
Diluted income per share from continuing operations
|
|
$
|
.58
|
|
|
$
|
.11
|
|
|
$
|
.19
|
|
Employee stock options representing 617,760 and
21,250 shares have been excluded from the diluted weighted
average share denominator for the years ended April 30,
2008 and 2007, respectively as their effect would be
anti-dilutive. There were no antidilutive stock options in
fiscal year 2006.
Stock
Based Compensation
Effective May 1, 2006, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting
Standard No. 123R (FAS 123R),
Share-Based Payment (Revised 2004). FAS 123(R)
50
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
supersedes previous accounting under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25) which were applicable for
2006 and 2005.
The Company elected to use the modified prospective transition
method permitted by FAS 123R and therefore has not restated
its financial results for prior periods. Under this transition
method, the compensation cost recognized by the Company
beginning in fiscal year 2007 includes (a) compensation
cost for all
stock-based
compensation awards that were granted prior to, but not vested
as of May 1, 2006, based on the
grant-date
fair value estimated in accordance with the provisions of
Statement of Financial Accounting Standard No. 123
(FAS 123), Accounting for Stock Based
Compensation, and (b) compensation cost for all
stock-based
compensation awards granted subsequent to May 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of FAS 123R. Compensation expense is
recognized only for those options, stocks, or stock units
expected to vest with forfeitures estimated at the grant date
based on the Companys historical experience and future
expectations. If the actual number of forfeitures differs from
those estimated by the management, additional adjustments may be
required in future periods. Compensation expense is recognized
on a straight-line basis over the total requisite service period
of each award, and recorded in operating expenses on the
Consolidated Statement of Operations. For fiscal year 2007, the
Company recorded $251,000 (pre-tax) of stock-based compensation
expense related to stock options, which is included in general
and administrative expense in the Consolidated Statements of
Operations. As a result of implementing FAS 123R, the
Companys income before income taxes decreased by $251,000
and net income decreased by $189,000 as compared to the amounts
that the Company would have recorded for stock-based
compensation expense under prior accounting rules. In addition,
FAS 123R requires the Company to classify tax benefits
resulting from tax deductions in excess of stock-based
compensation expense recognized as a financing activity. The
Company recognized a tax benefit of $291,000 resulting from tax
deductions in excess of stock compensation expense in fiscal
year 2008. There were no tax benefits resulting from tax
deductions in excess of stock compensation expense in fiscal
years 2007 and 2006. See Note 11: Stock-based
Compensation for further information related to the
Companys stock compensation plans.
Prior to fiscal year 2007, stock-based compensation plans were
accounted for using the intrinsic value method prescribed in APB
25 and related interpretations. Had compensation cost for the
plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of
FAS 123, the Companys net income and basic and
diluted net income per share would have been changed to the pro
forma amounts indicated below (in thousands, except for per
share data):
|
|
|
|
|
|
|
2006
|
|
|
Net income, as reported
|
|
$
|
6,677
|
|
Add: Employee stock-based compensation under APB 25 included in
net income
|
|
|
5,524
|
|
Deduct: Total employee stock-based compensation expense under
fair value based method for all awards
|
|
|
(2,736
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
9,465
|
|
|
|
|
|
|
Net income per share basic:
|
|
|
|
|
As reported
|
|
$
|
.19
|
|
Pro forma basic
|
|
$
|
.27
|
|
Net income per share diluted:
|
|
|
|
|
As reported
|
|
$
|
.18
|
|
Pro forma diluted
|
|
$
|
.26
|
|
Upon adoption of FAS 123R, the Company continued to use the
Black-Scholes option pricing model as its method of valuation
for stock option awards. The Companys determination of the
fair value of stock option awards on the date of grant using an
option pricing model is affected by the Companys stock
price as
51
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not
limited to, the expected life of the award, the Companys
expected stock price volatility over the term of the award,
forfeitures, and projected exercise behaviors. Although the fair
value of stock option awards is determined in accordance with
FAS 123R, the Black-Scholes option pricing model requires
the input of subjective assumptions, and other assumptions could
provide differing results.
No options were granted in fiscal year 2006. For fiscal year
2007 and 2008, the weighted-average fair values at the date of
grant for options granted were estimated using the Black-Scholes
option-pricing model, based on the following assumptions:
(i) no expected dividend yields; (ii) expected
volatility rates of 61.9% and 62.02%, respectively, based on
historical volatility of our stock price; and
(iii) expected lives of two and six years, respectively,
based on historical experience. The risk-free interest rate
applied was 4.97% and 4.98%, respectively, based on U.S Treasury
constant maturity interest rate whose term is consistent with
the expected life of our stock options.
Note 2 Recently
Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board issued
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48).
FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return,
and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted FIN 48 on
May 1, 2007. FASB Staff Position
No. 48-1,
Definition of Settlement in FASB Interpretation
No. 48 (FSP
FIN 48-1)
provides a set of conditions that must be evaluated when
determining whether a tax position has been effectively settled.
We contemplated the provisions of FSP
FIN 48-1
upon the initial adoption of FIN 48. Additional discussion
on the impact of adopting FIN 48 is included in
Note 13, Income Taxes.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 Defining Fair Value
Measurement (FAS 157) which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about
fair value measurements. FAS 157 is effective for the
Company at the beginning of its fiscal year 2009. In February
2008, the FASB issued
FSP 157-2
Partial Deferral of the Effective Date of Statement
157
(FSP 157-2).
FSP 157-2
delays the effective date of FAS 157, for all nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008. The Company does
not expect the adoption of FAS 157 to have a material
effect on its Consolidated Financial Statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards (FAS 159) The Fair
Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115. FAS 159 provides entities with an
option to choose to measure eligible items at fair value at
specified election dates. If elected, an entity must report
unrealized gains and losses on the item in earnings at each
subsequent reporting date. The fair value option may be applied
instrument by instrument, and with a few exceptions, such as
investments otherwise accounted for by the equity method, is
irrevocable (unless a new election date occurs); and is applied
only to entire instruments and not to portions of instruments.
The Company is currently evaluating the potential impact of
adopting FAS 159 on its consolidated financial statements,
which is effective for the Company at the beginning of its
fiscal year 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), Business
Combinations (FAS 141R) and Statement of
Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51
(FAS 160). These new standards are the
U.S. GAAP outcome of a joint project with the International
Accounting Standards Board (IASB). FAS 141R
applies prospectively to business combinations for which the
acquisition
52
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 and will
significantly change the accounting for business combinations in
a number of areas, including the treatment of contingent
consideration, acquisition costs, intellectual property,
research and development, and restructuring costs. FAS 160
establishes reporting requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the non-controlling owners. The Company is
currently evaluating the impact of adopting FAS 141R and
FAS 160 on its Consolidated Financial Statements which are
effective for the Company at the beginning of its fiscal year
2010.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (FAS 161), which
requires enhanced disclosures about a companys derivative
and hedging activities. The Company currently is evaluating the
impact of the adoption of the enhanced disclosures required by
FAS 161 which is effective for the Company at the beginning
of its fiscal year 2010.
In May 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles (FAS 162). The
new standard is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial
statements that are presented in conformity with generally
accepted accounting principles (GAAP) for
nongovernmental entities in the United States. FAS 162 is
effective 60 days following SEC approval of the Public
Company Accounting Oversight Board Auditing amendments to AU
Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
The Company is currently evaluating the impact, if any, of
adopting FAS 162, on its Consolidated Financial Statements.
Note 3 Receivables
Receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Trade Accounts Receivable
|
|
$
|
32,410
|
|
|
$
|
28,097
|
|
Unbilled Revenues
|
|
|
4,589
|
|
|
|
2,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,999
|
|
|
|
30,244
|
|
Less Allowance for Doubtful Accounts
|
|
|
(3,367
|
)
|
|
|
(2,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,632
|
|
|
$
|
27,329
|
|
|
|
|
|
|
|
|
|
|
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 collectibility. 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.
53
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 4 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw Materials and Parts
|
|
$
|
19,671
|
|
|
$
|
16,871
|
|
Work in Process
|
|
|
3,215
|
|
|
|
2,765
|
|
Finished Goods
|
|
|
6,453
|
|
|
|
6,957
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,339
|
|
|
$
|
26,593
|
|
|
|
|
|
|
|
|
|
|
Note 5 Property
and Equipment
Property and Equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land and Buildings
|
|
$
|
8,745
|
|
|
$
|
7,426
|
|
Machinery and Equipment
|
|
|
27,192
|
|
|
|
22,504
|
|
Furniture and Fixtures
|
|
|
4,015
|
|
|
|
2,746
|
|
Leasehold Improvements
|
|
|
6,261
|
|
|
|
6,004
|
|
Construction in Progress
|
|
|
2,109
|
|
|
|
4,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,322
|
|
|
|
42,925
|
|
Less Accumulated Depreciation and Amortization
|
|
|
(29,532
|
)
|
|
|
(27,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,790
|
|
|
$
|
15,459
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended April 30, 2008,
2007, and 2006 was $3.6 million, $2.7 million, and
$3.2 million, respectively. Assets held under capitalized
leases and included in property and equipment were $501,000 and
$573,000 as of April 30, 2008 and 2007. Accumulated
depreciation on these assets was $111,000 and $354,000 as of
April 30, 2008 and 2007, respectively.
Note 6 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 component of the Companys finite intangible assets was
as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
2008
|
|
2007
|
|
Patents
|
|
$
|
5,202
|
|
|
$
|
4,808
|
|
Less Accumulated Depreciation and Amortization
|
|
|
(1,816
|
)
|
|
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
Patents, net
|
|
$
|
3,386
|
|
|
$
|
3,260
|
|
|
|
|
|
|
|
|
|
|
Patents are amortized on a straight-line basis over the legal
life of the underlying patents. The weighted average
amortization period for patents is 17 years.
54
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets with indefinite lives consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
|
April 30, 2007
|
|
|
Trademarks
|
|
$
|
676
|
|
|
$
|
507
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets with definite lives
for continuing operations for the years ended April 30,
2008, 2007 and 2006 amounted to $282,000, $283,000 and $131,000,
respectively. The estimated annual amortization expense is
$290,000 for continuing operations for each year through
April 30, 2011.
Note 7 Accrued
Liabilities
The Companys accrued liabilities consist of warranty
obligations, restructuring liabilities, professional fee
accruals, and other items.
Warranty
Obligations
The Company provides for the estimated costs of product
warranties at the time the product revenue is recognized. The
provisions are 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.
In fiscal year 2007 the term of the product warranty on standard
system sales was extended from one year to two years for the
North America Segment. The warranty accrual was increased in
fiscal year 2007 due to the extension of the warranty term on
new system sales, as well as the current year warranty cost
experience. The Company believes that the warranty accrual as of
April 30, 2008 is sufficient to cover expected warranty
costs.
The following table shows the fiscal year 2008 and 2007 activity
for the Companys warranty accrual:
|
|
|
|
|
Accrued warranty balance as of April 30, 2006
|
|
$
|
1,699
|
|
Accruals for warranties of 2007 sales
|
|
|
4,306
|
|
Warranty costs incurred in fiscal 2007
|
|
|
(3,600
|
)
|
|
|
|
|
|
Accrued warranty balance as of April 30, 2007
|
|
$
|
2,405
|
|
Accruals for warranties of fiscal 2008 sales
|
|
|
3,589
|
|
Warranty costs incurred in fiscal 2008
|
|
|
(2,893
|
)
|
|
|
|
|
|
Accrued warranty balance as of April 30, 2008
|
|
$
|
3,101
|
|
|
|
|
|
|
Restructuring
Charges
In June 2005, the Company announced the closing and relocation
of its Wixom, Michigan business to its Burlington, Ontario
facility. The Company terminated 25 employees and recorded
associated severance benefits of $175,000 which were paid in the
first six months of fiscal year 2006. In October 2005, once the
facility was vacated, the Company recorded restructuring charges
related to lease termination costs of $278,000, net of expected
sublease income, and wrote off leasehold improvements of
$108,000 related to this leased space.
During the fourth quarter of fiscal year 2006, the Company
reassessed its lease accrual as it has been unsuccessful in its
efforts to sublease the vacated facility and increased the
accrual by $575,000 which represents the remaining lease
payments as well as other lease charges related to the facility
which will remain vacant until the termination of the lease.
55
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There was no restructuring liability balance and no
restructuring expense recorded as of April 30, 2008.
The following table summarizes accrued restructuring activity
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
America
|
|
|
International
|
|
|
Applications
|
|
|
Consolidated
|
|
|
|
Facility
|
|
|
Facility
|
|
|
Facility
|
|
|
Total Facility
|
|
|
|
Exit
|
|
|
Exit
|
|
|
Exit
|
|
|
Exit
|
|
|
|
Costs
|
|
|
Costs
|
|
|
Costs
|
|
|
Costs
|
|
|
Balance, April 30 2006
|
|
$
|
67
|
|
|
$
|
164
|
|
|
$
|
684
|
|
|
$
|
915
|
|
Cash payments
|
|
|
(36
|
)
|
|
|
(28
|
)
|
|
|
(364
|
)
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30 2007
|
|
$
|
31
|
|
|
$
|
136
|
|
|
$
|
320
|
|
|
$
|
487
|
|
Cash payments
|
|
|
(31
|
)
|
|
|
(28
|
)
|
|
|
(320
|
)
|
|
|
(379
|
)
|
Other
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Long-Term
Obligations and Notes Payable
The Companys long-term obligations consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
|
April 30, 2007
|
|
|
Long-term loan
|
|
$
|
2,914
|
|
|
$
|
3,422
|
|
Capital lease obligations
|
|
|
396
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,310
|
|
|
|
3,601
|
|
Less current maturities
|
|
|
(977
|
)
|
|
|
(822
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
2,333
|
|
|
$
|
2,779
|
|
|
|
|
|
|
|
|
|
|
The Company has a collaterized long-term variable rate loan that
bears interest at the current annual rate of 3.67% at
April 30, 2008 and matures in 2011. During the twelve
months ended April 30, 2008, the Company paid off $754,000
of the loan balance. Scheduled principal payments on long-term
debt are as follows:
|
|
|
|
|
Year Ending April 30,
|
|
|
|
|
2009
|
|
$
|
832
|
|
2010
|
|
|
832
|
|
2011
|
|
|
832
|
|
2012
|
|
|
418
|
|
2013
|
|
|
|
|
2014 and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,914
|
|
|
|
|
|
|
The Company leases certain office equipment under agreements
that are classified as capital leases and are included in the
accompanying balance sheet under property and equipment, of
which $144,000 is current.
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
April 30, 2007
|
|
Revolving credit facilities in Taiwan
|
|
$
|
1,118
|
|
|
$
|
6,366
|
|
|
|
|
|
|
|
|
|
|
56
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The revolving credit facilities consist of four unsecured credit
facilities in Taiwan with a commitment totaling
$6.5 million at April 30, 2008, bearing interest at
rates ranging from 2.56% to 2.76% per annum. At April 30,
2008, outstanding credit facilities will mature within one year
and can be extended for like periods, as needed, at the
banks option.
Amendment
to Credit Agreement
On July 19, 2007, the Company entered into a Second
Amendment (the Amendment) to its Credit Agreement,
increasing its revolving line of credit from $30 million to
$45 million and permitting the use of the line of credit
for the repurchase of stock. This line of credit has a maturity
date of July 8, 2008 and is collateralized by a general
lien on all of the Companys assets. Certain subsidiaries
guaranteed the Companys line of credit under the
Agreement. Interest rates under the Agreement are at LIBOR plus
a percentage depending on the Companys leverage ratio
(financial covenants) or at the Bank of
Americas prime rate in effect from time to time, at the
Companys option. LIBOR and prime rate at April 30,
2008 were 2.80% and 5.00%, respectively. The Company also pays
an annual letter of credit fee equal to 1.25% of the amount
available to be drawn under each outstanding letter of credit.
The annual letter of credit fee is payable quarterly in arrears
and varies depending on the Companys leverage ratio. In
addition, the Agreement includes a subjective acceleration
clause which permits the lenders to demand payment in the event
of a material adverse change. As of April 30, 2008, the
Company had $42.8 million of domestic unused line of credit
available, net of $2.2 million in outstanding letters of
credit. The Company was in compliance with all financial
covenants as of April 30, 2008.
New
Senior Credit Facility
On June 9, 2008, the Company secured a new senior secured
credit facility with an aggregate principal amount of
$100 million. Refer to Note 19
Subsequent Events to the Consolidated Financial
Statements for further discussion on this credit facility.
Note 9 Commitments
and Contingencies
Lease
Commitments
The Company rents certain facilities and equipment under
non-cancelable agreements treated for financial reporting
purposes as operating leases. The majority of leases currently
in effect are renewable for periods of two to five years. Rent
expense under these leases was approximately $3.0 million,
$2.9 million and $2.1 million for the years ended
April 30, 2008, 2007 and 2006, respectively.
Future minimum rents payable under operating leases for years
ending April 30 are as follows:
|
|
|
|
|
Year Ending April 30,
|
|
|
|
|
2009
|
|
$
|
2,821
|
|
2010
|
|
|
2,480
|
|
2011
|
|
|
2,249
|
|
2012
|
|
|
1,719
|
|
2013
|
|
|
1,078
|
|
2014 and thereafter
|
|
|
588
|
|
|
|
|
|
|
|
|
$
|
10,935
|
|
|
|
|
|
|
57
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Product
Liability
Currently there are outstanding product liability claims arising
out of the sale of its current and former products. To minimize
the financial impact of product liability claims, the Company
purchases product liability insurance in amounts and under terms
considered acceptable to management.
At any point in time covered by these financial statements,
there are outstanding product liability claims against the
Company, and incidents are known to management that may result
in future claims. Management periodically evaluates the merit of
all claims, including product liability claims, as well as
considering unasserted claims. Recoveries, if any, may be
realized from indemnitors, codefendants, insurers or insurance
guaranty funds. Management believes its insurance coverage is
adequate to satisfy any liabilities that are incurred.
Legal
Proceedings
At any time, the Company may be involved in legal proceedings in
addition to the Omax, Crucible, and Collins and Aikman matters
described below. The Companys policy is to routinely
assess the likelihood of any adverse judgments or outcomes
related to legal matters, as well as ranges of probable losses.
A determination of the amount of the reserves required, if any,
for these contingencies is made after thoughtful analysis of
each known issue and an analysis of historical experience in
accordance with Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies, and
related pronouncements. The Company records 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. 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 with defending claims
are expensed as incurred.
Omax Corporation (Omax) filed suit against the
Company on November 18, 2004. The case, Omax
Corporation v. Flow International Corporation, United
States District Court, Western Division at Seattle, Case
No. CV04-2334,
was filed in federal court in Seattle, Washington. The suit
alleges that the Companys products infringe Omaxs
Patent Nos. 5,508,596 entitled Motion Control with
Precomputation and 5,892,345 entitled Motion Control
for Quality in Jet Cutting. The suit also seeks to have
the Companys Patent No. 6,766,216 entitled
Method and System for Automated Software Control of
Waterjet Orientation Parameters declared invalid,
unenforceable and not infringed. The Company has brought claims
against Omax alleging certain of their products infringe its
Patent No. 6,766,216. Omax manufactures waterjet equipment
that competes with the Companys equipment. Both
Omaxs and the Companys patents are directed at the
software that controls operation of the waterjet equipment.
Although the Omax suit seeks damages of over $100 million,
the Company believes Omaxs claims are without merit and
the Company intends not only to contest Omaxs allegations
of infringement but also to vigorously pursue its claims against
Omax with regard to its own patent. Proceedings in the case have
been stayed as the parties negotiate the possible purchase of
Omax by the Company. The outcome of this case is uncertain and
an unfavorable outcome ranging from $0 to $100 million is
reasonably possible. The Company has not provided any loss
accrual related to the Omax lawsuit as of April 30, 2008.
The Company has spent, and could continue to spend considerable
amounts on this case except as discussed in Note 17:
Pending Omax Transaction.
In litigation arising out of a June 2002 incident at a Crucible
Metals (Crucible) facility, the Companys
excess insurance carrier notified the Company in December 2006
that it would contest its obligation to provide coverage for the
property damage. The Company believes the carriers
position is without merit, and following the commencement of a
declaratory judgment action, the carrier agreed to provide the
Company a defense. The carrier has reserved its right to contest
coverage at a future date, however. The unresolved claims
relating to this incident total approximately $7 million,
and the Company may spend substantial amounts if the carrier
chooses, at a future date, to withdraw its defense or contest
coverage.
58
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2007, the Company received a claim seeking the return of
amounts paid by Collins and Aikman Corporation, a customer, as
preference payments. The amount sought as preference payments is
approximately $1 million. The Company intends to vigorously
contest this claim; however, the ultimate outcome or likelihood
of this specific claim cannot be determined at this time and an
unfavorable outcome ranging from $0 to $1 million is
reasonably possible.
Other Legal Proceedings For matters other
than Omax, Crucible, and Collins and Aikman described above, the
Company does not believe these proceedings will have a material
adverse effect on its consolidated financial position, results
of operations or cash flows.
Other Commitments Pursuant to an employment
termination agreement (the Agreement) with its
former President and Chief Executive Officer (the former
Executive), the Company recognized $2.9 million in
fiscal year 2007 and $2.8 million in fiscal year 2008
related to payments and benefits in connection with his
retirement. In accordance with the Agreement, a cash severance
payment of $4.9 million, less applicable tax withholdings,
was paid to the former Executive in January 2008. Included in
Other Current Liabilities as of April 30, 2008 is $499,000
related to this Agreement, which is expected to be paid out
within the next year.
Note 10 Shareholders
Equity
Preferred
Share Rights Purchase Plan
On June 7, 1990 the Board of Directors of the Company
adopted a Preferred Share Rights Purchase Plan (the
Plan). The Plan was amended and restated as of
September 1, 1999 and amended by Amendments No. 1 and
2 dated October 29, 2003 and October 19, 2004,
respectively. Pursuant to the Plan, as amended, a Preferred
Share Purchase Right (a Right) is attached to each
share of Company common stock. The Rights will be exercisable
only if a person or group acquires 15% or more of the
Companys common stock or announces a tender offer, the
consummation of which would result in ownership by a person or
group of 15% or more of the common stock. Each Right entitles
shareholders to buy one one-hundredth of a share of
Series B Junior Participating Preferred Stock (the
Series B Preferred Shares) of the Company at a
price of $45. If the Company is acquired in a merger or other
business combination transaction, each Right will entitle its
holder to purchase a number of the acquiring companys
common shares having a value equal to twice the exercise price
of the Right. If a person or group acquires 15% or more of the
Companys outstanding common stock, each Right will entitle
its holder (other than such person or members of such group) to
receive, upon exercise, a number of the Companys common
shares having a value equal to two times the exercise price of
the Right. Following the acquisition by a person or group of 15%
or more of the Companys common stock and prior to an
acquisition of 50% or more of such common stock, the Board of
Directors may exchange each Right (other than Rights owned by
such person or group) for one share of common stock or for one
one-hundredth of a Series B Preferred Share. Prior to the
acquisition by a person or group of 15% of the Companys
common stock, the Rights are redeemable, at the option of the
Board, for $.0001 per Right. The Rights expire on
September 1, 2009. The Rights do not have voting or
dividend rights, and until they become exercisable, have no
dilutive effect on the earnings of the Company. There are no
outstanding rights under this plan as of April 30, 2008 and
2007.
Warrant
Repurchase
On October 25, 2007, in a privately negotiated transaction,
the Company purchased from certain funds managed or advised by
Third Point LLC (collectively, Third Point)
outstanding warrants that gave Third Point the right until March
of 2010 to purchase 403,300 of the Companys common stock
at an exercise price of $4.07 per share (the
Warrants). Third Point purchased the Warrants,
together with shares of common stock, in the Companys
March 2005 Private Investment Public Equity transaction (the
PIPE Transaction). The Warrants were repurchased
from Third Point in connection with the Companys
previously announced program to repurchase up to
$45 million of the Companys securities. The Warrants
were repurchased at a
59
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
price of $7.43 per Warrant for an aggregate purchase price of
$3 million. In accordance with FASB Technical Bulletin
(FTB)
No. 85-6,
the total fair value of the repurchased warrants of
$2.4 million was accounted for as the cost of the warrants
and was included as a reduction to capital in excess of par
within the Companys total stockholders equity in
fiscal year 2008. The cash paid in excess of the fair market
value of those warrants of $629,000 was charged against income
as Other Expense in the second quarter of 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. Under the
terms of the PIPE Transaction, the Company was obligated to file
and keep effective a registration statement on
Form S-1
for the resale of the shares issued in the PIPE Transaction as
well as the shares issuable upon exercise of the Warrants until
February 22, 2011. Failure to keep the registration
statement continuously effective would have resulted in
penalties of approximately $250,000 per month. With the
repurchase of the Warrants, the Company is no longer obligated
to keep the registration statement effective.
Note 11 Stock-based
Compensation
The Company maintains a stock-based compensation plan (the
2005 Plan) which was adopted in September 2005 to
attract and retain the most talented employees and promote the
growth and success of the business by aligning long-term
interests of employees with those of shareholders. The 2005 Plan
provides for a pool of 2.5 million shares which the
Company, at its discretion, may choose to grant in the form of
stock, stock units, stock options, stock appreciation rights, or
cash awards.
The Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standard No. 123R,
Share-Based Payment, (FAS 123R) as of
the beginning of fiscal year 2007. The Company elected to use
the modified prospective transition method permitted by
FAS 123R. Accordingly, prior period amounts were not
restated. Under this transition method, the compensation cost
recognized by the Company beginning in fiscal year 2007 includes
(a) compensation cost for all stock-based compensation
awards that were granted prior to, but not vested as of
May 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of Statement of Financial
Accounting Standard No. 123 (FAS 123),
Accounting for Stock Based Compensation, and
(b) compensation cost for all stock-based compensation
awards granted subsequent to May 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of FAS 123R. Compensation expense is recognized
only for those options, stocks, or stock units expected to vest
with forfeitures estimated at the grant date based on the
Companys historical experience and future expectations. If
the actual number of forfeitures differs from those estimated by
the management, additional adjustments may be required in future
periods. Compensation expense is recognized on a straight-line
basis over the total requisite service period of each award, and
recorded in operating expenses on the Consolidated Statement of
Income.
Stock
Options
The Company grants common stock options to employees and
directors of the Company with service
and/or
performance conditions. The compensation cost of service
condition stock options is based on their fair value at the
grant date and recognized ratably over the service period.
Compensation cost of stock options with performance conditions
is based upon current performance projections and the percentage
of the requisite service that has been rendered. All options
become exercisable upon a change in control of the Company
unless the surviving company assumes the outstanding options or
substitutes similar awards for the outstanding
60
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards of the 2005 Plan. Options are granted with an exercise
price equal to the fair market value of the Companys
common stock on the date of grant. The maximum term of options
is 10 years from the date of grant.
The following tables summarize the stock option activities for
the year ended April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Term (Years)
|
|
|
Outstanding at April 30, 2007
|
|
|
1,063,404
|
|
|
$
|
8.99
|
|
|
$
|
2,819,601
|
|
|
|
3.61
|
|
Granted during the period
|
|
|
200,000
|
|
|
|
11.40
|
|
|
|
|
|
|
|
|
|
Exercised during the period
|
|
|
(252,054
|
)
|
|
|
4.75
|
|
|
|
|
|
|
|
|
|
Expired or forfeited during the period
|
|
|
(237,850
|
)
|
|
|
10.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2008
|
|
|
773,500
|
|
|
$
|
10.53
|
|
|
$
|
195,801
|
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2008
|
|
|
573,500
|
|
|
$
|
10.23
|
|
|
$
|
195,801
|
|
|
|
2.15
|
|
Vested or expected to vest at April 30, 2008
|
|
|
573,500
|
|
|
|
10.23
|
|
|
|
195,801
|
|
|
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total intrinsic value of options exercised
|
|
$
|
1,262
|
|
|
$
|
776
|
|
|
$
|
1,138
|
|
Total fair value of options vested
|
|
|
|
|
|
|
211
|
|
|
|
76
|
|
Cash received from exercise of share options
|
|
|
1,198
|
|
|
|
1,518
|
|
|
|
2,003
|
|
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 in fiscal year 2006. Information
pertaining to the Companys assumptions to calculate the
fair value of the stock options granted during the two years
ended April 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Options granted
|
|
|
200,000
|
|
|
|
21,250
|
|
Weighted average grant-date fair value of stock options granted
|
|
$
|
6.90
|
|
|
$
|
4.76
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
Weighted average expected volatility
|
|
|
62.02
|
%
|
|
|
61.86
|
%
|
Risk-free interest rate
|
|
|
4.98
|
%
|
|
|
4.97
|
%
|
Weighted average expected term (in years)
|
|
|
6
|
|
|
|
2
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
The Company uses historical volatility in estimating expected
volatility and historical employee exercise 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.
For the two years ended April 30, 2008, the Company
recognized compensation expense related to stock options of
$172,000 and $344,000, respectively. During the second quarter
of fiscal year 2008, $101,000 of the
61
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense recorded in fiscal year 2007 related to performance
based stock options was reversed as the performance criteria for
vesting were not met. There were no stock options granted during
the year ended April 30, 2006. As of April 30, 2008,
total unrecognized compensation cost related to nonvested stock
options was $1.1 million which is expected to be recognized
over a weighted average period of 3.25 years.
Service-Based
Stock Awards
The Company grants common stock or stock units to employees and
non-employee directors of the Company with service conditions.
Each non-employee director is eligible to receive and is granted
common stock worth $40,000 annually. The compensation cost of
the common stock or stock units are based on their fair value at
the grant date and recognized ratably over the service period.
The following table summarizes the service-based stock award
activities for employees for the two years ended April 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at April 30, 2006
|
|
|
87,890
|
|
|
$
|
4.86
|
|
Granted during the period
|
|
|
51,750
|
|
|
|
11.75
|
|
Forfeited during the period
|
|
|
(19,609
|
)
|
|
|
3.38
|
|
Vested during the period
|
|
|
(47,498
|
)
|
|
|
6.16
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2007
|
|
|
72,533
|
|
|
|
9.33
|
|
Granted during the period
|
|
|
296,773
|
|
|
|
7.86
|
|
Forfeited during the period
|
|
|
(6,650
|
)
|
|
|
13.05
|
|
Vested during the period
|
|
|
(37,207
|
)
|
|
|
7.87
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2008
|
|
|
325,449
|
|
|
$
|
8.06
|
|
|
|
|
|
|
|
|
|
|
For the three years ended April 30, 2008, 2007 and 2006,
the Company recognized compensation expense related to
service-based stock awards of $732,000, $655,000 and
$1.6 million, respectively. As of April 30, 2008,
total unrecognized compensation cost related to service-based
stock awards of $2.3 million is expected to be recognized
over a weighted average period of 3.77 years.
Performance-Based
Stock Awards
In fiscal year 2006 and 2007, the Company adopted Long-Term
Incentive Plans (the LTIPs) under which the
executive officers are to receive stock awards based on the
Companys performance measures over three-year performance
periods. These plans were adopted annually with different
performance targets. Awards will vary based on the degree to
which the Companys performance meets or exceeds
predetermined thresholds at the end of the performance period.
No payout will occur unless the Company exceeds certain minimum
threshold performance objectives. Compensation expense is based
upon current performance projections for the three-year period
and the percentage of the requisite service that has been
rendered. Compensation cost for the unvested portion of the LTIP
awards is based on their grant-date fair value. The LTIPs permit
employees to elect to net-settle a portion of the award paid in
stock to meet the employees share of minimum withholding
requirements, which the Company accounts for as equity.
62
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the LTIPs activities for the two
years ended April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at April 30, 2006
|
|
|
279,000
|
|
|
$
|
7.81
|
|
Granted during the period
|
|
|
172,500
|
|
|
|
13.50
|
|
Forfeited during the period
|
|
|
(270,000
|
)
|
|
|
9.50
|
|
Vested during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2007
|
|
|
181,500
|
|
|
$
|
10.71
|
|
Granted during the period
|
|
|
|
|
|
|
|
|
Cancelled during the period
|
|
|
(69,000
|
)
|
|
|
7.81
|
|
Forfeited during the period
|
|
|
(38,000
|
)
|
|
|
10.51
|
|
Vested during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2008
|
|
|
74,500
|
|
|
$
|
13.50
|
|
|
|
|
|
|
|
|
|
|
The company did not recognize any compensation expense related
to LTIPs for the two years ended April 30, 2008 and 2007 as
the achievement of the performance criteria was not deemed
probable. The Company recognized compensation expense related to
LTIPs of $1.2 million for the year ended April 30,
2006 as the performance objectives were deemed to be probable at
that time. This expense was subsequently reversed in fiscal year
2007 because the performance objectives were no longer deemed
probable. As of April 30, 2008, there was no unrecognized
compensation cost related to performance-based stock awards.
Under an annual incentive plan adopted in fiscal year 2007, the
Company granted executives and certain employees annual
bonuses in the form of cash
and/or
common stock of the Company. Awards were based on the
Companys performance and individual goals and were usually
granted following the conclusion of the Companys fiscal
year end. The shares of the common stock to be issued were not
known at the grant date and the amount of the stock was
equivalent to a fixed monetary amount. These awards were
recorded as liability awards under FAS 123R as of
April 30, 2007. For the year ended April 30, 2007, the
Company recognized compensation expense related to the annual
incentive plan of $477,000.
In July 2003, the Company entered into retention agreements with
certain key executives which were initially intended to provide
these individuals with incentives to remain with the Company by
providing periodic cash payments and a stock distribution in
January 2007. As the Companys financial condition had
improved, thus reducing the risk that key executives would seek
other employment, and the Companys stock price had risen
increasing the cost to the Company associated with the equity
portion of the retention agreements, the Company Board of
Directors approved on January 11, 2006 the termination of
these agreements and distribution of remaining unpaid amounts.
The Company recorded a total of $2.6 million during the
year ended April 30, 2006 which included $899,000 from the
impact of the acceleration on awards of restricted stock units
under these agreements and their termination.
|
|
Note 12
|
Pension
and Other Post Retirement Benefits
|
The Company has a 401(k) savings plan in which employees may
contribute a percentage of their compensation. At its
discretion, the Company may make contributions based on employee
contributions and length of employee service. Company
contributions and expenses under the plan for the year ended
April 30, 2008, 2007 and 2006 were $944,000, $806,000 and
$815,000, respectively.
The Company sponsors a defined benefit pension plan in Taiwan,
which is governed by a local regulation: The Labor Standard Law
(1986). As required by the Labor Standard Law, the Company must
remit 4% of the
63
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees base salary into a designated investment account
for the Pension Plan monthly. The pension benefit an employee is
entitled to equals two months salary with a maximum of
45 months salary. An employee is eligible to withdraw
their pension benefit upon 25 years of service, age 55
with 15 years of service, or age 60, if the employee
is still employed by the Company upon retirement. If an employee
terminates prior to retirement, the employee forfeits all
accrued benefits under the Plan. Due to a change in Taiwanese
law, all new employees hired after July 2005, are not subject to
this plan, thus, the plan is frozen. The Company uses an April
30 measurement date for its plan.
All plan assets are deposited in an interest earning account.
The amount of net periodic cost recognized in fiscal year 2008
and 2007 was $71,000 and $131,000, respectively. The accumulated
benefit obligation, unrecognized net transition obligation, and
unrecognized loss as of April 30, 2008 were
$1.3 million, $20,000 and $378,000, respectively. The
Companys projected benefit payments under this plan over
the next year are $541,000.
Effective April 2007, the Company adopted Statement of Financial
Accounting Standards No. 158 (FAS 158)
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FAS Statements
No. 87, 88, 106, and 132(R). FAS 158 requires an
employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in
its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur
through comprehensive income of a business entity. This
statement also requires an employer to measure the funded status
of a plan as of the date of its year-end statement of financial
position. A cumulative effect adjustment of $201,000 was
recorded as an adjustment to accumulated other comprehensive
income upon adoption of FAS 158.
The following table provides a reconciliation of the changes in
the plans benefit obligations and fair value of plan
assets for the two-year period ended April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Changes in the Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation beginning balance
|
|
$
|
1,456
|
|
|
$
|
1,627
|
|
Service Cost
|
|
|
34
|
|
|
|
57
|
|
Interest Cost
|
|
|
56
|
|
|
|
68
|
|
Actuarial (Gain)/Loss
|
|
|
118
|
|
|
|
(323
|
)
|
Benefits Paid
|
|
|
|
|
|
|
(123
|
)
|
Foreign Exchange Adjustment
|
|
|
151
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation ending balance
|
|
$
|
1,815
|
|
|
$
|
1,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Changes in the Value of Plan Assets
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets beginning balance
|
|
$
|
1,044
|
|
|
$
|
1,130
|
|
Actual Return (Loss) on Plan Assets
|
|
|
38
|
|
|
|
28
|
|
Employer Contribution
|
|
|
51
|
|
|
|
55
|
|
Benefits Paid
|
|
|
|
|
|
|
(123
|
)
|
Foreign Exchange Adjustment
|
|
|
104
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets ending balance
|
|
$
|
1,237
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
64
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Actuarial assumptions used to determine benefit obligations were
as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
2008
|
|
2007
|
|
Discount rate
|
|
|
3.50
|
%
|
|
|
3.75
|
%
|
Expected rate of return on assets
|
|
|
2.75
|
%
|
|
|
2.75
|
%
|
Salary increase rate
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
The components of consolidated income (loss) before income taxes
include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income (Loss) from Continuing Operations Before Provision
(Benefit) for Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
11,546
|
|
|
$
|
(3,557
|
)
|
|
$
|
(5,368
|
)
|
Foreign
|
|
|
3,748
|
|
|
|
10,565
|
|
|
|
17,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,294
|
|
|
$
|
7,008
|
|
|
$
|
12,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal
|
|
$
|
298
|
|
|
$
|
103
|
|
|
$
|
|
|
State
|
|
|
124
|
|
|
|
52
|
|
|
|
46
|
|
Foreign
|
|
|
4,053
|
|
|
|
2,637
|
|
|
|
4,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Tax Expense (after NOL Benefit of $6,312, $3,147, and
$1,583)
|
|
|
4,475
|
|
|
|
2,792
|
|
|
|
4,591
|
|
Federal
|
|
|
(9,347
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
(2,376
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
631
|
|
|
|
194
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Expense (Benefit) (Net of Valuation Allowance of
$17,453, $0, and $0)
|
|
|
(11,092
|
)
|
|
|
194
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tax Provision (Benefit)
|
|
$
|
(6,617
|
)
|
|
$
|
2,986
|
|
|
$
|
5,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
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,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Income tax provision (benefit) at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State and local taxes net of federal tax benefit
|
|
|
3.1
|
|
|
|
|
|
|
|
0.2
|
|
Foreign tax rate differential
|
|
|
(4.4
|
)
|
|
|
(8.5
|
)
|
|
|
(7.9
|
)
|
Change in valuation allowance
|
|
|
(113.1
|
)
|
|
|
(171.1
|
)
|
|
|
(61.7
|
)
|
Non deductible/nontaxable items
|
|
|
3.3
|
|
|
|
3.4
|
|
|
|
27.0
|
|
Foreign earnings not previously subject to U. S. tax
|
|
|
6.1
|
|
|
|
20.9
|
|
|
|
39.5
|
|
Foreign Withholding Taxes
|
|
|
8.9
|
|
|
|
11.6
|
|
|
|
|
|
Foreign income taxes
|
|
|
0.1
|
|
|
|
|
|
|
|
7.9
|
|
Alternative minimum taxes
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
|
|
Stock based compensation
|
|
|
0.8
|
|
|
|
(6.5
|
)
|
|
|
|
|
Tax credits
|
|
|
2.8
|
|
|
|
(7.8
|
)
|
|
|
|
|
Statutory to U.S. GAAP adjustments
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
Prior year reconciled amounts
|
|
|
|
|
|
|
174.6
|
|
|
|
(7.4
|
)
|
Other, net
|
|
|
3.2
|
|
|
|
(9.5
|
)
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
(43.3
|
)%
|
|
|
42.6
|
%
|
|
|
43.2
|
%
|
66
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of the net deferred tax asset or liability are as
follows:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
|
April 30, 2007
|
|
|
Current deferred tax assets/(liabilities):
|
|
|
|
|
|
|
|
|
Accounts receivable allowances
|
|
$
|
311
|
|
|
$
|
294
|
|
Inventory capitalization
|
|
|
173
|
|
|
|
272
|
|
Net operating loss carryforward
|
|
|
964
|
|
|
|
|
|
Obsolete inventory
|
|
|
921
|
|
|
|
746
|
|
Vacation accrual
|
|
|
322
|
|
|
|
337
|
|
Foreign tax liability
|
|
|
|
|
|
|
(213
|
)
|
Other
|
|
|
419
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Current Deferred Tax Assets
|
|
|
3,110
|
|
|
|
1,461
|
|
Valuation allowance
|
|
|
(906
|
)
|
|
|
(1,674
|
)
|
|
|
|
|
|
|
|
|
|
Total Current Deferred Tax Assets/(Liabilities)
|
|
|
2,204
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
Long-Term:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
1,627
|
|
|
|
1,534
|
|
Net operating loss carryforward
|
|
|
16,206
|
|
|
|
23,151
|
|
Capital loss
|
|
|
1,602
|
|
|
|
1,561
|
|
Goodwill
|
|
|
1,040
|
|
|
|
1,686
|
|
Foreign taxes
|
|
|
|
|
|
|
3,813
|
|
Foreign withholding tax
|
|
|
(521
|
)
|
|
|
(1,370
|
)
|
Deferred compensation
|
|
|
465
|
|
|
|
495
|
|
Undistributed foreign earnings
|
|
|
(636
|
)
|
|
|
(5,402
|
)
|
AMT credits
|
|
|
889
|
|
|
|
479
|
|
Deferred income
|
|
|
|
|
|
|
(404
|
)
|
Foreign tax basis differential
|
|
|
110
|
|
|
|
128
|
|
Foreign unrealized exchange gain/loss
|
|
|
(6,158
|
)
|
|
|
(6,696
|
)
|
Foreign tax asset
|
|
|
|
|
|
|
304
|
|
Currency Translation Adjustment
|
|
|
(482
|
)
|
|
|
269
|
|
All other
|
|
|
1,594
|
|
|
|
3,725
|
|
|
|
|
|
|
|
|
|
|
Long-Term Deferred Tax Assets
|
|
|
15,736
|
|
|
|
23,273
|
|
Valuation allowance
|
|
|
(7,988
|
)
|
|
|
(24,339
|
)
|
|
|
|
|
|
|
|
|
|
Total Long-Term Deferred Tax Asset
|
|
|
7,748
|
|
|
|
(1,066
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset (Liability)
|
|
$
|
9,952
|
|
|
$
|
(1,279
|
)
|
|
|
|
|
|
|
|
|
|
As of April 30, 2008, the Company had approximately
$35.4 million of domestic net operating loss and
$36.7 million of state net operating loss carryforwards to
offset future taxable income for federal and state income tax
purposes. These net operating loss carryforwards expire between
fiscal year 2022 and fiscal year 2026. Net operating loss
carryforwards in foreign jurisdictions amount to
$39.3 million. Most of the foreign net operating losses can
be carried forward indefinitely, with certain amounts expiring
between fiscal years 2014 and 2017. The federal, state and
foreign net operating loss carryforwards per the income tax
returns filed include uncertain tax positions taken in prior
years. Due to the application of FIN 48, the net operating
loss carryforwards per the income tax returns are larger than
the net operating loss deferred tax asset recognized
67
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for financial statement purposes. The Company also has a capital
loss carryover of $4.3 million which expires in 2011.
Utilization of net operating losses may be subject to limitation
due to ownership changes and other limitations provided by the
Internal Revenue code and similar state provisions. If such a
limitation applies, the net operating loss may expire before
full utilization.
Based on results of operations for the fiscal years ended
April 30, 2008, 2007, and 2006 and anticipated future
taxable income, the Company believes that certain of its
deferred tax assets are more likely than not to be realized.
Accordingly, in the fiscal year ended April 30, 2008, the
Company reversed approximately $17.2 million of valuation
allowance on U.S. net operating loss (NOL) carryforwards
and other net deferred tax assets, which will more likely than
not, be realized in future periods. Additionally, during the
first quarter of fiscal year 2008, after concluding that certain
of its German deferred tax assets were more likely than not to
be realized, the Company reversed approximately $1 million
of valuation allowance against net deferred tax assets in this
jurisdiction. At April 30, 2008, the value of our deferred
tax assets was $10 million.
With the exception of certain of its subsidiaries, it is the
general practice and intention of the Company to reinvest the
earnings of its
non-U.S. subsidiaries
in those operations. As of April 30, 2008 the Company has
not made a provision for US 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 its subsidiaries in Taiwan, Japan, and Switzerland
for which it provides deferred taxes. It is not practical to
estimate the amount of deferred tax liability relating to the
Companys investment in its other foreign subsidiaries.
In fiscal year 2008, the Company repatriated $9.8 million,
net of tax of $885,000 from three foreign subsidiaries and the
Company plans to continue repatriating additional funds from
these foreign subsidiaries in the future. In fiscal year 2007,
we repatriated $8.0 million, net of tax of
$1.4 million from two foreign subsidiaries and in fiscal
year 2006, we repatriated $1.4 million from these foreign
subsidiaries.
The Company is subject to taxation in the United States, various
state and foreign jurisdictions. The Company is no longer
subject to examinations by tax authorities for years prior to
fiscal year 2002.
As a result of certain realization requirements of FASB
Statement No. 123(R) Stock-based Compensation, the
table of deferred tax assets and liabilities shown above does
not include certain deferred tax assets at April 30, 2008
and 2007 that arose directly from tax deductions related to
equity compensation in excess of compensation recognized for
financial reporting. Equity will be increased by
$1.4 million if and when such deferred tax assets are
ultimately realized. The Company uses FAS 109 ordering for
purposes of determining when excess tax benefits have been
realized.
The following is a tabular reconciliation of the total amounts
of the Companys FIN 48 unrecognized tax benefits for
the year:
|
|
|
|
|
Balance as of May 1, 2007
|
|
$
|
9,094
|
|
Gross increases tax positions in prior periods
|
|
|
|
|
Gross decreases tax positions in prior periods
|
|
|
|
|
Gross increases in tax positions due to currency fluctuations
|
|
|
365
|
|
Gross decreases due to tax rate changes
|
|
|
(269
|
)
|
Settlements
|
|
|
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
Balance as April 30, 2008
|
|
$
|
9,190
|
|
|
|
|
|
|
The balance of unrecognized tax benefits at April 30, 2008
is $9.2 million of tax benefits that, if recognized would
affect the effective tax rate and would result in adjustments to
other tax accounts, primarily deferred taxes. The timing of
payments related to these unrecognized tax benefits is
uncertain; however, none of this amount is expected to be paid
within the next twelve months. There is a reasonable possibility
that the
68
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unrecognized tax benefits may change within the next twelve
months, but the Company does not expect this change to be
material to the Consolidated Financial Statements.
|
|
Note 14
|
Related
Party Transactions
|
Arlen I. Prentice, a director, is Chief Executive Officer of
Kibble & Prentice Holding Company, a company that,
together with its wholly owned subsidiary, provides insurance
brokerage services to the Company. The Company believes that its
transactions with Kibble and Prentice Holding Company are
conducted at an arms-length.
Premium payments for insurance coverage that Kibble &
Prentice Holding Company passes on to the underwriters have
totaled $1.9 million, $2.1 million and
$2.4 million for the fiscal years ended April 2008, 2007
and 2006, respectively. These amounts included commissions of
$137,000, $218,000 and $282,000, in each of the respective
fiscal years.
As of April 30, 2008, the Company owed $166,000 to Kibble
and Prentice Holding Company which is included in Other Accrued
Liabilities balance on the Consolidated Financial Statements.
|
|
Note 15
|
Discontinued
Operations
|
In April 2008, the Company decided to sell its CIS Technical
Solutions division (CIS division), which was
previously reported as part of its Applications segment.
Accordingly, 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, 2008 and the
Consolidated Statements of Cash Flows for the years ended
April 30, 2008, 2007 and 2006 do not reflect discontinued
operations treatment for the CIS division as the Company has not
reclassified its balance sheets, as the related amounts are not
material, or cash flows for this discontinued operation.
On October 31, 2005, the Company completed the sale of
certain of its non-core businesses; Avure Technologies,
Incorporated, Flow International FPS AB, Avure Technologies AB
subsidiaries, and its 51% interest in Flow Autoclave Systems
(together, the Avure Business) as a result of a
strategy to divest itself of operations that do not rely upon
its core ultra-high-pressure water pump business. The
consideration included cash of $6 million (less a working
capital adjustment of $951,000) which was received on
November 1, 2005 and a promissory note of $8 million
payable 90 days after closing at a simple interest rate of
10% per annum. In addition, the Company received a promissory
note of $2 million payable at 3 years after closing at
a simple interest rate of 6% per annum. The $2 million
promissory note was reduced by 50% of the pension balance of the
International Press segment as of October 31, 2005 or
$687,500.
The purchaser of the Avure Business (the Purchaser)
subsequently claimed that it was entitled to a further working
capital adjustment of $1.4 million, which claim the Company
disputed. The Company and the Purchaser agreed to resolve this
claim in accordance with the arbitration procedure agreed on at
the time of sale. The Company and the Purchaser also agreed that
the Purchaser would have a limited right to prepay, at a 12.5%
discount, the balance of the promissory note due 3 years
after closing. The prepay right expired on January 31,
2007. The Company received a partial payment of $995,000 in the
second quarter of fiscal year 2007.
On August 16, 2006, the Company received notice from the
arbitrator to whom the dispute had been referred regarding the
resolution of its outstanding dispute with the Purchaser.
Although the Company did not agree with all the findings of the
arbitrator, the decision by the arbitrator constituted a final
resolution of all disputes between the Purchaser and the Company
regarding the calculation of net working capital. The adjustment
amounted to $1,026,000 (including interest and arbitration
fees), of which $300,000 was previously accrued as a liability.
The net amount of $685,000 was recorded as a Loss on Sale from
Discontinued
69
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operations for the year ended April 30, 2007. The Company
delivered payment to the Purchaser on August 21, 2006.
As of April 30, 2008, the promissory note balance of
$321,000, which includes interest of $104,000, is included in
Other Current Assets.
Summarized financial information for the three year period ended
April 30, 2008 for the discontinued operations is set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Sales
|
|
$
|
4,107
|
|
|
$
|
3,664
|
|
|
$
|
18,875
|
|
Income before provision for income taxes
|
|
|
673
|
|
|
|
654
|
|
|
|
1,384
|
|
Provision for income taxes
|
|
|
(230
|
)
|
|
|
(236
|
)
|
|
|
(612
|
)
|
Income from operations of discontinued operations
|
|
|
443
|
|
|
|
418
|
|
|
|
772
|
|
|
|
Note 16
|
Business
Segments and Geographical Information
|
The Companys operating segments are based upon the manner
in which internal financial information is produced and
evaluated by the chief operating decision maker (the
Companys Chief Executive Officer). The Companys
segments are evaluated on an operating income basis.
The Company has identified four reportable segments. These
segments, North America Waterjet, Asia Waterjet, Other
International Waterjet (together known as Waterjet), and
Applications, utilize the Companys released pressure
technology. The Waterjet operation includes cutting and cleaning
operations, which are focused on providing total solutions for
the aerospace, automotive, job shop, surface preparation and
paper industries. The Applications operation provides specialty
engineered robotic systems designed for material removal and
separation of various materials and for factory automation.
These systems are primarily used in automotive applications.
Effective September 2007, our Applications segment ceased the
pursuit of sales of non-waterjet automation systems to focus on
increasing revenue from systems that integrate waterjet cutting
technology.
In April 2008, the Company begun to pursue the sale of its CIS
Technical Solutions division (CIS division), which
was previously reported as part of the Applications segment.
Accordingly, the Company has recast all periods presented to
reflect this divisions results as discontinued operations.
Refer to Note 15, Discontinued Operations of the
Notes to the Consolidated Financial Statements for further
discussion on the results of CIS division for the three years
ended April 30, 2008.
Segment operating results are measured based on revenue growth,
gross margin and operating income (loss).
70
FLOW
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below presents information about the reported
operating income (loss) and assets of the Company for the years
ended April 30, 2008, 2007 and 2006.
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Inter-Segment
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North
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Other
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Eliminations
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America
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Asia
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International
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and
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Waterjet
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Waterjet
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Waterjet
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Applications
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Reconciliations*
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Total
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2008
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External sales
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$
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130,556
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$
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30,739
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$
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67,804
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|
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$
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15,160
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$
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|
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$
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244,259
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Inter-segment sales
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69,992
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1,358
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167
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|
891
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(72,408
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)
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Depreciation and amortization
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2,765
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|
|
552
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|
|
300
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|
|
|
357
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|
|
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|
|
|
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3,974
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|
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|
|
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|
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Operating income
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|
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9,985
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|
|
|
3,548
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|
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5,685
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|
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(3,541
|
)
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|
|
1,102
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|
|
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16,779
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Income tax provision (benefit)
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|
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(9,682
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)
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|
|
991
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|
|
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2,038
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|
|
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(188
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)
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|
|
224
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|
|
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(6,617
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)
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