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FLOW > SEC Filings for FLOW > Form 10-Q on 12-Mar-2013All Recent SEC Filings

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Form 10-Q for FLOW INTERNATIONAL CORP


12-Mar-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Forward-looking statements in this report, including without limitation, statements relating to our 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 the following examples:

statements regarding the effects of global financial and economic conditions, credit and equity market volatility and continued fluctuations in the global economy and the impact this may have on our business and financial condition;

statements regarding our belief that the diversity of our products and geographic presence along with the expansion of our indirect sales channel and our unmatched customer access will continue to minimize the impact that any one country or economy has on our consolidated results;

statements regarding our technological leadership position and our belief that our technological capabilities for developing products with superior characteristics provide us potential growth opportunities as well as a competitive advantage;

statements regarding our continued investments in lead generation, product enhancements, new product development and in our employees which we believe are critical to achieving our strategic objectives;

statements regarding our belief that we are well positioned to continue growing our business organically over the long-term by enhancing our product offerings and expanding our customer base through our global channels of distribution;

statements regarding the financial expectations for our new products;

statements regarding our ability to mitigate the risk of higher commodity and fuel prices;

statements regarding our belief that our channels of distribution are unparalleled in our industry and our ability to effectively manage them;

statements regarding our belief that the changes we have made in our Advanced segment, along with growing our revenue base, will enable us to maintain gross profit margins in a normal range of 25% plus or minus a few points, as well as meeting our customer requirements in this segment;

statements regarding our use of cash, cash needs, generation of cash through operations, and ability to raise capital and/or use our Credit Facility;

statements regarding our belief that our existing cash and cash equivalents, along with the expected proceeds from our operations and available amounts under our Credit Facility, will provide adequate liquidity to fund our operations through at least the next twelve months;

statements regarding our ability to fund future capital spending through cash from operations and/or from external financing;

statements regarding our ability to repay our subordinated notes;

statements regarding our ability to meet our debt covenants in future periods;

statements regarding anticipated results of potential or actual litigation; and

statements regarding the realizability of our deferred tax assets and our expectation that our unrecognized tax benefits will not change significantly within the next twelve months.

Certain other statements in Management's Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Our ability to fully implement our strategies and achieve our objective may be influenced by a variety of factors, many of which are beyond our control. For a detailed discussion of risk factors affecting our business and operations, see Item 1A, Risk Factors in our fiscal year 2012 Form 10-K, and Item 1A, Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2012, filed by us with the United States Securities and Exchange Commission on


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August 30, 2012. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied on as representing our estimates or views as of any subsequent date.

In this discussion and analysis, we discuss and explain our financial condition and results of operations, including:
Factors which might affect comparability of our results;

Our earnings and costs in the periods presented;

Changes in earnings and costs between periods;

Impact of these factors on our overall financial condition;

Expected future expenditures for capital projects; and

Expected sources of cash for future operations and capital expenditures.

As you read this discussion and analysis, refer to our Condensed Consolidated Statements of Operations included in Item 1 - Condensed Consolidated Financial Statements, which presents the results of our operations for the three and nine months ended January 31, 2013 and 2012. We analyze and explain the differences between the periods in the specific line items of our Condensed Consolidated Statements of Operations. This discussion and analysis has been organized as follows:
Executive Summary, including overview and future outlook;

Significant matters affecting comparability that are important to understanding the results of our operations and financial condition;

Results of operations beginning with an overview of our results, followed by a detailed review of those results by reporting segment;

Financial condition addressing liquidity position, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and

Critical accounting policies which require management's most difficult, subjective or complex judgment.

Executive Summary

Overview
Flow is a global technology-based manufacturing company committed to providing a
world class customer experience. We offer technology leadership and exceptional
waterjet performance to a wide-ranging customer base. Our versatile technology
benefits many cutting and surface preparation applications, delivering
profitable waterjet solutions and dynamic business growth opportunities to our
customers.

Third Quarter 2013 Highlights
During the third quarter of fiscal year 2013:
         Overall revenues of $67.7 million for the three months ended
          January 31, 2013 represent another all-time quarterly high and a 3%
          increase from $65.8 million in the year-ago quarter. We have recorded
          sequential quarterly revenue growth in nine of the past ten quarters;


         We continue to experience strong demand for consumable parts across
          most of our geographic markets with sales up 9% to $20.7 million over
          the year-ago quarter. For the quarter, our global spare parts business
          was lower as anticipated from the all-time high reported in the second
          quarter of fiscal year 2013 due to the impact of fewer selling days in
          the quarter;


         Standard segment gross margins of 40% decreased moderately
          quarter-over-quarter and will vary period to period as a result of
          product and geographic mix. Our Advanced segment gross margins
          increased by 400 basis points to 31% compared to the year-ago quarter
          based on project mix;


         We generated income from continuing operations of $2.7 million or
          earnings per share of $0.06 which compares to income from continuing
          operations of $3.3 million, or $0.07 per share in the comparative prior
          period;


         Our consolidated adjusted earnings before interest, tax and
          depreciation ("Adjusted EBITDA") was $6.9 million as compared to $8.1
          million in the year-ago quarter. A reconciliation of Adjusted EBITDA to
          net income, which is the GAAP financial measure that is most directly
          comparable to our non-GAAP financial measure, is provided herein; and


         We had a net cash position, which we define as cash and cash
          equivalents, less subordinated notes and any other debt, of $2.2
          million as of January 31, 2013, which compares to a net cash position
          of $3.4 million as of April 30,


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2012. We believe that future cash flows from operations and our borrowing capacity should provide adequate liquidity to fund our operations, to repay our subordinated notes and fund capital for planned growth.

Looking Ahead
We believe that we are well positioned to continue growing our business
organically over the long-term through product development, unmatched customer
access and continued operating leverage. Although other factors will likely
impact us, including some that we do not foresee, we believe that our
performance for the remainder of fiscal year 2013 and beyond may be affected by
the following:
         Economic Climate. The current economic environment continues to affect
          our business in a number of direct and indirect ways including:
          consumer demand for our products, differences in customer demand in the
          different geographic regions in which we operate; profit margins
          subject to pricing in the different geographic regions, sales mix due
          to differing products; changes in currency exchange rates; lack of
          credit availability; inflation; and business disruptions due to
          difficulties experienced by suppliers and customers.


         New Products. We continue to make strategic investments in research and
          development for existing and new products, and to invest in research
          and development of advanced and innovative technologies for future
          application. We believe that delivering innovative and high-value
          solutions is critical to meeting customer needs and achieving our
          future growth. We remain positive with regard to our global
          introduction of our Mach 4 and Mach 2 series products and we anticipate
          stronger contributions from these products in the future.


         Distribution Channels. We continue expanding both our direct and
          indirect distribution channels for broader geographic access to
          potential customers. We believe our current global network of sales
          agents and distributors are unparalleled in the industry.


         Operations and Manufacturing. We continue to monitor commodity pricing
          to proactively mitigate the risk of changing commodity and fuel prices.
          We continue to pursue opportunities for streamlining our distribution,
          logistics and manufacturing operations, focus on improving inventory
          management, optimizing transportation costs, and providing a high level
          of service to our customers.


         Advanced Segment. We continue to pursue new contracts and projects
          within this segment. Recently, new commitments for significant projects
          have been received and we continue to receive interest as companies
          expand production capabilities to include waterjets. In addition to
          securing future business, we have partnered with external resources
          with incremental capabilities to augment our internal resources. We
          believe that these changes, along with growing our revenue base, will
          enable us to maintain gross profit margins in a normal range of 25%
          plus or minus a few points, as well as meet our customer requirements.

Management remains focused on creating long-term shareholder value. We believe that Adjusted EBITDA, which we define as net income (loss), as determined in accordance with accounting principles generally accepted in the United States of America ("GAAP"), excluding the effects of income taxes, depreciation, amortization of intangible assets, interest expense, and other non-cash charges, which includes such items as stock-based compensation expense, foreign currency gains or losses, and other allowable add backs pursuant to our Credit Facility Agreement, is a good measure of our core performance in creating this value. The following table reconciles our Adjusted EBITDA for the respective three and nine months ended January 31, 2013 and 2012:

Reconciliation of Adjusted EBITDA to Net
Income: (in thousands)                             Three Months Ended             Nine Months Ended
                                                       January 31,                   January 31,
                                                    2013            2012          2013          2012
Net Income                                    $    2,611         $  3,316     $    6,942     $  6,806
Add Back:
Depreciation and Amortization                      1,546            1,572          4,385        4,723
Income Tax Provision                               1,551            2,041          4,380        4,279
Interest Charges                                     297              317            962          937
Non-Cash Charges (i)                                 942              868          2,637        2,092
Adjusted EBITDA                               $    6,947         $  8,114     $   19,306     $ 18,837

(i) Represents allowable add backs pursuant to Credit Facility Agreement.

Adjusted EBITDA is a non-GAAP financial measure and the presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The items excluded from this non-GAAP financial measure are significant components of our financial statements and must be


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considered in performing a comprehensive analysis of our overall financial results. We use this measure, together with our GAAP financial metrics, to assess our financial performance, allocate resources, evaluate our overall progress towards meeting our long-term financial objectives, and to assess compliance with our debt covenants. We believe that this non-GAAP financial measure is useful to investors and analysts in allowing for greater transparency with respect to the supplemental information used by us in our financial and operational decision making. Our calculation of Adjusted EBITDA may not be consistent with calculations of similar measures used by other companies.

Matters Affecting Comparability

Our financial performance over the past few years has been driven by several factors, principally the general economic conditions within our global markets, our product and project mix, the impact of strategic investments in our business, and fluctuations in the relationship of foreign currencies to the U.S. dollar. These key factors have impacted the comparability of our results of operations in the past and are likely to affect them in the future.

General Economic Conditions in our Global Markets Our products and services are available worldwide. Demand for our products depends on the level of new capital investment and planned maintenance by our customers. The level of capital expenditures depends, in turn, on the general economic conditions within that market as well as access to capital at reasonable cost. Our financial performance will continue to be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global channels of distribution, manufacturing capabilities, the expansion of market opportunities, and successfully engineering innovative new product applications for end users in a variety of geographic markets. However, we believe that our geographic end markets and product diversification has and will continue to minimize the impact that any one country or economy has on our consolidated results.

Product and Project Mix
Our profit margins vary in relation to the relative product and project mix, including the market segments that we serve, the type of product we sell, the geographic location in which the product is sold, the end market for which the product is designed, and the relative percentage of total revenue represented by our Standard systems, Advanced systems, and aftermarket sales.

Investments in Business
We believe that continued investment in lead generation, product enhancements, new product development and in our employees is critical to achieving our strategic objectives. Comparable period-over-period operating expenses will differ depending on the timing and magnitude of these investments. We expect that we will be able to leverage our overall operating expenses in future periods as our business continues to grow.

Currency Translation
The volatility in the global economic environment continues to result in significant volatility in the global currency markets. Since the majority of our international operations are conducted in currencies other than the U.S. dollar, currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts. During fiscal year 2013, the U.S. dollar has strengthened against the average exchange rates for these currencies versus the comparable prior year period, negatively impacting the translation of our international revenues and earnings during the current fiscal year.

In addition, some of our transactions that occur in our international locations are denominated in U.S. dollars, exposing them to exchange rate fluctuations when converted to their local currencies. These transactions include U.S. dollar denominated purchases of inventory and intercompany liabilities. Fluctuations in exchange rates can impact the profitability of our foreign operations and reported earnings and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates.


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Results of Operations
(Tabular amounts in thousands)
                     Three Months Ended                                          Nine Months Ended
                        January 31,             Increase (Decrease)                 January 31,               Increase (Decrease)
                     2013          2012            $              %             2013          2012                $               %
Sales             $  67,658     $ 65,808     $    1,850            3  %      $ 200,931     $ 190,371     $     10,560               6 %
Gross Margin         26,653       26,071            582            2  %         76,866        74,507            2,359               3 %
Selling, General,
and
Administrative
Expenses             21,868       20,082          1,786            9  %         63,883        62,197            1,686               3 %
Operating Income      4,785        5,989         (1,204 )        (20 )%         12,983        12,310              673               5 %
Expressed as a %
of Sales:
Gross Margin             39 %         40 %                      (100 )  bpts        38 %          39 %                           (100 ) bpts
Selling, General,
and
Administrative
Expenses                 32 %         31 %                       100    bpts        32 %          33 %                           (100 ) bpts
Operating Income          7 %          9 %                      (200 )  bpts         6 %           6 %                              -   bpts


_____________________
bpts = basis points
Consolidated Sales by Category

                           Three Months Ended                                        Nine Months Ended
                              January 31,              Increase (Decrease)              January 31,             Increase (Decrease)
                           2013           2012            $              %          2013          2012              $             %
Standard System Sales  $    41,859     $ 40,071     $     1,788           4  %   $ 122,151     $ 111,942     $     10,209          9  %
Advanced System Sales        5,065        6,709          (1,644 )       (25 )%      12,970        18,971           (6,001 )      (32 )%
Consumable Parts Sales      20,734       19,028           1,706           9  %      65,810        59,458            6,352         11  %
                       $    67,658     $ 65,808     $     1,850           3  %   $ 200,931     $ 190,371     $     10,560          6  %

Segment Results of Operations

We report our operating results to the chief operating decision maker based on market segments which are consistent with management's long-term growth strategy. Our reportable segments are Standard and Advanced. The Standard segment includes sales and cost of sales related to our cutting, surface preparation and cleaning systems using ultrahigh-pressure water pumps as well as parts and services to sustain these installed systems. Systems included in this segment do not require significant custom configuration. The Advanced segment includes sales and cost of sales related to our complex aerospace and automation systems which require specific custom configuration and advanced features, including robotics, to match unique customer applications as well as parts and services to sustain these installed systems. Segment results are measured based on revenue growth and gross margin.

This section provides a comparison of sales and gross margin for each of our reportable segments for the respective three and nine months ended January 31, 2013 and 2012.

Standard Segment    Three Months Ended                                       Nine Months Ended
                       January 31,            Increase (Decrease)               January 31,               Increase (Decrease)
                    2013          2012            $            %            2013          2012                $               %
Sales            $  62,579     $ 59,076     $     3,503         6 %      $ 187,798     $ 171,267     $     16,531             10 %
% of total
company sales           92 %         90 %            NM       200   bpts        93 %          90 %             NM            300   bpts
Gross Margin        25,082       24,244             838         3 %         74,669        70,093            4,576              7 %
Gross Margin as

% of sales 40 % 41 % NM (100 ) bpts 40 % 41 % NM (100 ) bpts



bpts = basis points
NM = not meaningful


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For the three and nine months ended January 31, 2013:

Sales in our Standard segment increased $3.5 million or 6%, and $16.5 million or 10% over the prior year comparative periods. Excluding the impact of foreign currency changes, sales in the Standard segment increased $4.0 million or 7% and $21.1 million or 12% for the respective three and nine months ended January 31, 2013 when compared to the prior year comparative periods. The quarter-to-date and year-to-date increases were primarily due to the following:

Growth in system sales volume for certain of our geographic regions for aggregate growth of $1.8 million or 4% and $10.2 million or 9% over the prior year comparative periods; and

Consumable parts sales for this segment also increased $1.7 million or 9% and $6.3 million or 11% for the respective three and nine months ended January 31, 2013 over the prior year comparative period based on higher system utilization by our customers and increased system sales volumes across most of our regions.

Gross margin for the three and nine months ended January 31, 2013 amounted to $25.1 million or 40% and $74.7 million or 40% of sales compared to $24.2 million or 41% and $70.1 million and 41% of sales in the prior year comparative periods. Generally, comparison of gross margin rates will vary period over period based on changes in our product sales mix and prices, geographic mix and levels of production volume.

Advanced Segment    Three Months Ended                                        Nine Months Ended
                       January 31,             Increase (Decrease)               January 31,            Increase (Decrease)
                     2013         2012            $             %             2013         2012            $             %
Sales            $   5,079      $ 6,732     $    (1,653 )      (25 )%      $ 13,133     $ 19,104     $    (5,971 )      (31 )%
% of total
company sales            8 %         10 %            NM       (200 )  bpts        7 %         10 %            NM       (300 )  bpts
Gross Margin         1,571        1,827            (256 )      (14 )%         2,197        4,414          (2,217 )      (50 )%
Gross Margin as
% of sales              31 %         27 %            NM        400    bpts       17 %         23 %            NM       (600 )  bpts


_____________________

bpts = basis points
NM = not meaningful

Sales in the Advanced segment vary period over period for various reasons, such as the timing of contract awards, timing of project design and manufacturing schedules, the timing of shipments to customers, and installation timing.

For the three and nine months ended January 31, 2013, sales in our Advanced segment decreased by $1.7 million or 25% and $6.0 million or 31% over the prior year comparative periods. The decrease in sales was primarily driven by the timing of our Advanced contracts. Sales for the nine months ended January 31, 2013 also included the impact of a $0.7 million sales discount made to an existing customer.

Gross margin for the respective three and nine months ended January 31, 2013 amounted to $1.6 million or 31% and $2.2 million or 17% of sales as compared to $1.8 million and 27% and $4.4 million and 23% of sales in the prior year comparative periods. Gross margin as a percentage of sales in the Advanced segment was lower for the nine months ended January 31, 2013 in part due to the impact of lower throughput in our manufacturing plant in the first half of fiscal year 2013, as a result of the type of projects and the stages of the projects. Advanced segment gross margins will also vary period over period based on changes in product mix, geographic mix and levels of production. Selling, General, and Administrative Expenses

                         Three Months Ended                                       Nine Months Ended
                            January 31,              Increase (Decrease)             January 31,           Increase (Decrease)
                         2013           2012             $             %          2013          2012           $           %
Sales and Marketing  $    12,837     $ 12,028     $         809         7 %   $   38,035     $ 36,806     $   1,229         3 %
. . .
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