<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-12448
FLOW INTERNATIONAL CORPORATION
WASHINGTON 91-1104842
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
23500 - 64TH AVENUE SOUTH
KENT, WASHINGTON 98032
(253) 850-3500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of common stock, as of December 9, 1998:
14,622,076 shares.
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets -
October 31, 1998 and April 30, 1998........................... 3
Condensed Consolidated Statements of Income -
Three Months Ended October 31, 1998 and 1997.................. 4
Condensed Consolidated Statements of Income -
Six Months Ended October 31, 1998 and 1997.................... 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended October 31, 1998 and 1997.................... 6
Consolidated Statements of Comprehensive Operations -
Three and Six Months Ended October 31, 1998 and 1997.......... 7
Notes to Condensed Consolidated Financial Statements............ 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 17
Item 2. Changes in Securities...................................... 17
Item 3. Defaults Upon Senior Securities............................ 17
Item 4. Submission of Matters to a Vote
of Security Holders.................................... 17
Item 5. Other Information.......................................... 17
Item 6. Exhibits and Reports on Form 8-K........................... 17
Signatures.............................................................. 18
</TABLE>
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
October 31, April 30,
1998 1998
----------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 4,696 $ 3,006
Trade Accounts Receivable, less allowances
for doubtful accounts of $703 and $699, respectively 40,553 37,359
Inventories 36,265 36,976
Deferred Income Taxes 2,493 2,493
Other Current Assets 6,391 7,846
--------- ---------
Total Current Assets 90,398 87,680
Property and Equipment, net 13,419 11,992
Intangible Assets, net of accumulated
amortization of $6,212 and $5,546, respectively 15,895 16,561
Deferred Income Taxes 1,562 1,562
Other Assets 2,782 3,386
--------- ---------
$ 124,056 $ 121,181
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable $ 1,072 $ 1,450
Current Portion of Long-Term Obligations 5,522 5,455
Accounts Payable 8,351 11,338
Accrued Payroll and Related Liabilities 4,230 5,428
Other Accrued Taxes 363 374
Other Accrued Liabilities 4,594 3,772
--------- ---------
Total Current Liabilities 24,132 27,817
Long-Term Obligations 37,465 32,076
Minority Interest 82 93
Stockholders' Equity:
Series A 8% Convertible Preferred Stock - $.01 par value, $500 liquidation
preference, 1,000,000 shares authorized, 0 issued
Common Stock - $.01 par value, 20,000,000 shares authorized, 14,613,623
shares outstanding at October 31, 1998
14,846,908 shares outstanding at April 30, 1998 146 148
Capital in Excess of Par 39,807 39,925
Retained Earnings 25,300 23,749
Cumulative Translation Adjustment (2,021) (2,286)
Unrealized Loss on Equity Securities Available For Sale (855) (341)
--------- ---------
Total Stockholders' Equity 62,377 61,195
--------- ---------
$ 124,056 $ 121,181
--------- ---------
--------- ---------
See Accompanying Notes to Condensed
Consolidated Financial Statements
</TABLE>
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
--------------------------
1998 1997
<S> <C> <C>
Revenues $ 38,383 $ 35,162
Cost of Sales 21,455 20,476
------- -------
Gross Profit 16,928 14,686
Expenses:
Marketing 6,254 5,327
Research and Engineering 2,963 2,150
General and Administrative 3,755 3,420
------- -------
12,972 10,897
------- -------
Operating Income 3,956 3,789
Interest and Other Expense, net (947) (1,014)
------- -------
Income Before Provision for Income Taxes 3,009 2,775
Provision for Income Taxes 820 971
------- -------
Net Income $ 2,189 $ 1,804
------- -------
------- -------
Basic Earnings Per Share $ .15 $ .12
------- -------
------- -------
Diluted Earnings Per Share $ .15 $ .12
------- -------
------- -------
</TABLE>
See Accompanying Notes to Condensed
Consolidated Financial Statements
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
--------------------------
1998 1997 *
<S> <C> <C>
Revenue:
Sales $74,805 $ 72,608
Services 6,423
Rentals 3,645
------- --------
Total Revenues 74,805 82,676
Cost of Sales:
Sales 42,042 42,944
Services 5,887
Rentals 1,099
------- --------
Total Cost of Sales 42,042 49,930
------- --------
Gross Profit 32,763 32,746
Expenses:
Marketing 11,988 12,222
Research and Engineering 6,022 4,650
General and Administrative 7,476 7,580
Restructuring (Note 3) 4,910
------- --------
25,486 29,362
------- --------
Operating Income 7,277 3,384
Interest and Other Expense, net (1,665) (2,069)
------- --------
Income Before Provision for Income Taxes 5,612 1,315
Provision for Income Taxes 1,627 460
------- --------
Net Income $ 3,985 $ 855
------- --------
------- --------
Basic Earnings Per Share $ .27 $ .06
------- --------
------- --------
Diluted Earnings Per Share $ .26 $ .06
------- --------
------- --------
</TABLE>
* See Note 3 which describes the disposition of certain business units during
fiscal 1998
See Accompanying Notes to Condensed
Consolidated Financial Statements
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
-------------------------
1998 1997 *
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 3,985 $ 855
Adjustments to Reconcile Net Income to Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 2,212 2,283
Restructuring Provision 4,910
Increase in assets, net of disposition (424) (7,486)
Decrease in liabilities, net of disposition (3,385) (1,294)
------- --------
Cash provided (used) by operating activities 2,388 (732)
------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment (3,066) (3,820)
Payment for business combination, net of cash acquired (2,528)
Other (421) 61
------- --------
Cash used by investing activities (3,487) (6,287)
------- --------
Cash Flows from Financing Activities:
Borrowings under line of credit agreements, net 7,104 9,833
Payments of long-term debt (2,026) (649)
Proceeds from issuance of common stock 713 1,154
Purchase of Flow common stock (3,267)
------- --------
Cash provided by financing activities 2,524 10,338
------- --------
Effect of exchange rate changes 265 (2,183)
------- --------
Increase in cash and cash equivalents 1,690 1,136
Cash and cash equivalents at beginning of period 3,006 2,479
------- --------
Cash and cash equivalents at end of period $ 4,696 $ 3,615
------- --------
------- --------
Supplemental Disclosures of Cash Flow Information
Fair value of assets acquired $ 4,735
Cash paid for assets acquired (2,818)
--------
Liabilities assumed $ 1,917
</TABLE>
* See Note 3 which describes the disposition of certain business units during
fiscal 1998
See Accompanying Notes to Condensed
Consolidated Financial Statements
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FLOW INTERNATIONAL CORPORATION
------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-------------------------
1998 1997
<S> <C> <C>
Net Income $ 2,189 $ 1,804
Other Comprehensive Income, net of tax:
Unrealized Loss on Equity Securities Available for Sale (109) (42)
Cumulative Translation Adjustment 866 648
------- -------
Comprehensive Income $ 2,946 $ 2,410
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
October 31,
-------------------------
1998 1997
<S> <C> <C>
Net Income $ 3,985 $ 855
Other Comprehensive Income, net of tax:
Unrealized Loss on Equity Securities Available for Sale (365) (130)
Cumulative Translation Adjustment 188 (837)
------- -------
Comprehensive Income (Loss) $ 3,808 $ (112)
------- -------
------- -------
</TABLE>
See Accompanying Notes to Condensed
Consolidated Financial Statements
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended October 31, 1998
(unaudited)
1. In the opinion of the management of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
the financial position, statements of operations, cash flows and
comprehensive operations for the interim periods presented. These interim
financial statements should be read in conjunction with the April 30, 1998
consolidated financial statements.
2. Basic earnings per share represents net income available to common
stockholders divided by the weighted average number of shares outstanding
during the period. Diluted earnings per share represents net income
available to common stockholders divided by the weighted average number of
shares outstanding including the potentially dilutive impact of stock
options, where appropriate.
Basic shares outstanding for the three months ended October 31, 1998 and
1997 were 14,749,000 and 14,669,000, respectively. For the six months ended
October 31, 1998 and 1997, basic shares outstanding were 14,823,000 and
14,615,000, respectively. Diluted shares outstanding for the three months
ended October 31, 1998 and 1997 were 15,027,000 and 15,058,000,
respectively. The diluted shares outstanding include potential dilutive
common shares from employee stock options of 278,000 and 389,000 for the
three months ended October 31, 1998 and 1997, respectively. For the six
months ended October 31, 1998 and 1997, diluted shares outstanding were
15,194,000 and 14,951,000, respectively. The diluted shares outstanding
include potential dilutive common shares from employee stock options of
371,000 and 336,000 for the six months ended October 31, 1998 and 1997,
respectively.
3. Included in the six month period ended October 31, 1997 are the results of
operations of the Access and Services businesses. The Company sold the
assets and certain liabilities of these operations in September 1997.
Associated with the sale, the Company recorded a $4.9 million charge during
the first quarter of fiscal 1998 to write down the assets sold to net
realizable value as well as provide for probable future obligations
associated with the sale. This charge is included as a separate component
of operating expenses in the accompanying Consolidated Statements of
Income. At April 30, 1998 the Company had recorded an $860,000 asset
valuation guarantee allowance related to the sale. At October 31, 1998 the
allowance had been reduced to $353,000. During the six months ended October
31, 1998 the Company utilized the allowance for $507,000 with no other
adjustments to the allowance during this period. During the six month
period ended October 31, 1997 the $860,000 allowance was created and
remained at $860,000 at October 31, 1997.
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended October 31, 1998
(unaudited)
4. During the quarter the Company purchased 336,000 shares of its common stock
for $3.3 million. Additionally during the quarter, the Company's
shareholders approved the change in the state of incorporation from
Delaware to Washington. Treasury Stock is not recognized under Washington
state law and accordingly, Common Stock, Capital in Excess of Par and
Retained Earnings have been reduced to reflect the retirement of the
Treasury Stock at both October 31, 1998 and April 30, 1998.
5. Inventories consist of the following:
(in thousands)
<TABLE>
<CAPTION>
October 31, 1998 April 30, 1998
---------------- --------------
<S> <C> <C>
Raw Materials and Parts $20,309 $21,090
Work in Process 7,855 9,312
Finished Goods 8,101 6,574
------- -------
$36,265 $36,976
</TABLE>
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE RESULTS OF OPERATIONS FOR THREE OF THE FIRST SIX MONTHS OF THE
PREVIOUS FISCAL YEAR, FISCAL 1998, FOR FLOW INTERNATIONAL CORPORATION ("FLOW"
OR THE "COMPANY"), ALSO INCLUDE THE ACCESS AND SERVICES OPERATIONS IN
ADDITION TO THE ULTRAHIGH-PRESSURE ("UHP") OPERATIONS. THE NON-CORE ACCESS
AND SERVICES OPERATIONS WERE SOLD DURING THE SECOND QUARTER OF FISCAL 1998.
Associated with this sale, the Company recorded a $4.9 million restructuring
provision during the first quarter of fiscal 1998 to write down the assets
sold to net realizable value as well as provide for probable future
obligations associated with the sale. This charge is included as a separate
component of operating expenses in the accompanying Consolidated Statements
of Income.
Given this disposition of operations during fiscal year 1998, two
separate Results of Operations reviews have been provided. The "UHP RESULTS
OF OPERATIONS ANALYSIS" provides a review of the on-going UHP operations for
the three and six month periods ended October 31, 1998 and 1997 and the
"ACCESS AND SERVICES OPERATIONS ANALYSIS" which reviews the results of
operations for Access and Services for the six month period ended October 31,
1998 and 1997.
The following pro forma table separates the Company's Consolidated
Statement of Income for the six month period ending October 31, 1998 and 1997
into the ongoing operations (UHP) and the divested operations (Access and
Services). The three month periods ended October 31, 1998 and 1997 as
presented on the Consolidated Statement of Income include only the UHP
operations. The Access and Services results include the restructuring charge:
<TABLE>
<CAPTION>
(In thousands) Six Months Ended October 31,
-----------------------------------------------------------------------------------
1998 1997
-------------------------------------- --------------------------------------
Access & Access &
UHP Services Consolidated UHP Services Consolidated
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 74,805 $ 74,805 $ 65,826 $ 16,850 $ 82,676
Gross Profit 32,763 32,763 27,499 5,247 32,746
Operating Expenses:
Marketing 11,988 11,988 10,202 2,020 12,222
Research and Engineering 6,022 6,022 4,387 263 4,650
General and Administrative 7,476 7,476 6,346 1,234 7,580
Restructuring 4,910 4,910
-------- -------- -------- -------- --------
Total Operating Expenses 25,486 25,486 20,935 8,427 29,362
Operating Income (Loss) 7,277 7,277 6,564 (3,180) 3,384
Interest and Other Exp., net (1,665) (1,665) (1,692) (377) (2,069)
Pre-tax Income (Loss) $ 5,612 $ 5,612 $ 4,872 $ (3,557) $ 1,315
</TABLE>
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
UHP RESULTS OF OPERATIONS ANALYSIS -
Revenues for the three months ended October 31, 1998 were $38.4
million, an increase of $3.2 million (9%) as compared to the prior year
quarter of $35.2 million. For the six month period ended October 31, 1998
revenues increased $9 million (14%) to $74.8 million as compared to $65.8
million in the prior year. Geographically, domestic revenue for the three
months ended October 31, 1998 increased 18% and European revenue increased
23% compared to the prior year. Quarterly revenue from Asia decreased 14% as
compared to the prior year; however, excluding the effects of exchange rate
changes between periods, sales in Asia increased 2% over the prior year. For
the six months ended October 31, 1998, domestic and European revenues
increased 24% and 21%, respectively, as compared to the prior year period.
Asian revenues, which represent 10% of year to date fiscal 1999 revenues,
were down 10% versus fiscal 1998. The Company's revenues can be segregated
into systems sales and consumables sales. In general a system sale is
comprised of a pump along with the robotics or articulation to move the
cutting head. Consumables represent parts used during the operation. Systems
revenues for the quarter were comparable with the prior year, but have
increased 10% on a year to date basis. Consumables revenues increased 31% and
21% for the three and six months ended October 31, 1998, respectively, over
the prior year periods.
Gross profit expressed as a percentage of revenues (gross margin
rate) was 44% for both the quarter and year to date as compared to 42% in the
prior year periods. Comparison of gross margin rates is dependent on the mix
of sales revenue types, which includes special system, standard system and
consumables sales. Systems typically carry lower gross margin rates than the
Company's consumable parts. Additionally, special systems are generally
custom designed and carry lower margins than the Company's standard systems
such as the Bengal, Flying Bridge and A-series. The gross margin rate
increase in both the quarter and year was primarily due to a higher
percentage of consumables and standard systems sales relative to special
systems sales versus the prior year periods.
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating expenses of $13 million increased $2.1 million (19%) for
the quarter ended October 31, 1998, compared to the prior year and were $25.5
million, up $4.6 million (22%) for the six months ended October 31, 1998
versus the prior year period. Marketing expenses increased $927,000 (17%) and
$1.8 million (18%) for the three and six month periods ended October 31,
1998, respectively as compared to the prior year periods. Expressed as a
percentage of revenue marketing expenses increased to 16% versus 15% in the
prior year periods. Research and engineering expense increased $813,000 (38%)
and $1.6 million (37%) for the three and six month periods ended October 31,
1998, respectively, as compared to the prior year periods. This reflects the
Company's continued aggressive pursuit of technological advances through
increased research and engineering spending. As a percentage of revenues,
research and engineering was 8% for both the three and six month periods
ended October 31, 1998 as compared to 6% of revenues for the second quarter
of fiscal 1998 and 7% of revenues for the year to date period last year. The
effect of this increased percentage of revenue, represents an additional
$600,000 in quarterly expenses or roughly $.03 per diluted share expense and
$1 million in year to date expenses or $.05 per diluted share expense.
General & administrative expense increased $335,000 (10%) and $1.1 million
(18%), respectively, as compared to the prior year periods. However general
and administrative expenses expressed as a percent of revenue were the same
in both the current and prior year quarter at 10%.
Operating income for the quarter ended October 31, 1998 was $4
million, an increase of $167,000 (4%) over the prior year quarter. For the
year, operating income was $7.3 million, an improvement of 11% over the like
period in the prior year.
Second quarter fiscal 1999 interest and other expense, net of
$947,000 represents a decrease of $67,000 (7%) compared to the prior year.
The current quarter includes $836,000 of interest expense, a decrease of
$122,000 versus the prior year period. The $111,000 of other expense, net, in
the quarter represents an increase of $55,000 over last year. Year-to-date,
interest expense has decreased $132,000 to $1.6 million, while other expense,
net, was $66,000 versus other income, net, of $39,000 in the same period in
fiscal 1998.
Based upon the expected tax position of the Company for fiscal 1999,
year to date taxes have been provided for at 29% of pre-tax income. Year to
date fiscal 1998 taxes were provided for at 35% of pre-tax income; however,
the net tax rate for the twelve months in fiscal 1998 was 29%. The income tax
rate was lower than the statutory rate in both the current and prior year due
primarily to lower foreign tax rates, various tax credits, benefits from the
foreign sales corporation, and an ongoing review of the Company's FAS 109
valuation allowance.
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Basic shares outstanding for the three months ended October 31, 1998
and 1997 were 14,749,000 and 14,669,000, respectively. For the six months
ended October 31, 1998 and 1997, basic shares outstanding were 14,823,000 and
14,615,000, respectively. Diluted shares outstanding for the three months
ended October 31, 1998 and 1997 were 15,027,000 and 15,058,000, respectively.
The diluted shares outstanding include potential dilutive common shares from
employee stock options of 278,000 and 389,000 for the three months ended
October 31, 1998 and 1997, respectively. For the six months ended October 31,
1998 and 1997, diluted shares outstanding were 15,194,000 and 14,951,000,
respectively. The diluted shares outstanding include potential dilutive
common shares from employee stock options of 371,000 and 336,000 for the six
months ended October 31, 1998 and 1997, respectively.
The Company recorded net income of $2.2 million, or $.15 per Basic
and Diluted share for the three months ended October 31, 1998, compared to
$1.8 million, or $.12 per Basic and Diluted share for the same prior year
period. Year to date, the Company recorded $4 million or $.27 per Basic and
$.26 per Diluted share as compared to $3.2 million or $.22 per Basic and $.21
per Diluted share in fiscal 1998.
ACCESS AND SERVICES OPERATIONS ANALYSIS -
The Access and Services operations were sold during fiscal 1998 and
thus did not have any activity during fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company generated $2.4 million from operations for the six
months ended October 31, 1998 compared to a use of $732,000 in its operating
activities during the six months ended October 31, 1997. Total debt, net of
cash, at October 31, 1998 was $39.4 million, up $3.4 million (9%) from April
30, 1998. During the second quarter of fiscal 1998 the Company repurchased
336,000 shares of the Company's stock for $3.3 million. The Company believes
that the available credit facilities and working capital generated by
operations, will provide sufficient resources to meet its operating and
capital requirements. The Company's Credit Agreement and Private Placement
require the Company to comply with certain financial covenants. As of October
31, 1998, the Company was in compliance with all such covenants.
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<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross trade receivables at October 31, 1998 increased $3.2 million
(8%), from April 30, 1998. Days sales in gross accounts receivable can be
negatively impacted by the traditionally longer payment cycle outside the
United States as well as timing of payments on large special system orders.
The Company's management does not believe these timing issues will present a
material adverse impact on the Company's short-term liquidity requirements.
Inventories at October 31, 1998 decreased $711,000 (2%) from April
30, 1998. This decrease includes the sale of approximately $3.8 million of
Access and Services inventory, at cost, to SafeWorks LLC, the purchasers of
the businesses. The Company had provided manufacturing services for the past
year as provided for in the purchase agreement. This agreement terminated in
August 1998 and the remaining inventory was sold at cost. UHP inventory has
increased $3.1 million since April 30, 1998. The increase reflects the
continued increasing demand for the Company's products, as well as new
product inventory such as "Fresher Under Pressure"(TM) inventory. Certain
products manufactured by Flow Robotics and Flow Automation can require an
extended manufacturing period and thus impact inventory levels from period to
period.
Year 2000 Issues and Conversion:
Background: Some computers, software, and other equipment include programming
code that limits the "year" field to two digits. Thus, these systems could
fail in the year 2000 in the event that the last two digits "00" are
interpreted to mean the year 1900. For this reason in fiscal 1998 the Company
began a conversion process to ensure that its systems would not be affected
by such a failure.
Assessment: The Year 2000 issues could affect computers, software, and other
equipment used, or maintained by the Company. The Company has reviewed its
internal computer programs and systems to determine if the programs and
systems are Year 2000 ready. The Company believes that its computer systems
will be year 2000 ready in a timely manner. To date, the Company has
converted its primary internal computer to Year 2000 compliant software and
hardware and is currently upgrading the internal computer systems of its
subsidiaries.
The estimated costs of these efforts are $250,000 and are not expected to
have a material affect on the Company's results. There can, however, be no
assurance to this effect. To date, no other Information Technology projects
that have a material effect on the Company's operations have been deferred.
-14-
<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Software Sold to Customers: The Company develops its own proprietary software
which controls the functions of some of its machines. The Company also sells
software or other electronic control devices purchased from third party
vendors. The Company believes that it has substantially identified and
resolved all potential Year 2000 issues with any of its software products.
However, the Company believes that it is not possible to determine with
complete certainty that its products are entirely Year 2000 ready. As with
most software, it is dependent upon hardware and other operating systems that
are provided by third party vendors not under the Company's control.
Internal Infrastructure: The Company is in the process of reviewing all of
its equipment that is used in the receiving, manufacturing, and shipping of
its products as well at its copiers, fax machines, elevators, telephone
systems and other equipment used to maintain daily operations. To date, the
Company has not identified any material issues that would affect its ongoing
operations. The Company has substantially completed its review of these
systems and does not expect any required modifications to have a material
adverse effect on its future financial results. However, the Company is
continuing to monitor the process and this estimate will be revised if
additional material information is discovered.
Suppliers: The Company initiated communication with all of its critical
suppliers in April 1998 by mailing questionnaires designed to determine the
Year 2000 readiness of the supplier's business systems. The Company is in the
process of reviewing supplier responses. Based upon responses to date, the
Company believes that its critical suppliers will be Year 2000 compliant and
does not currently expect any adverse effects on its daily operations. While
the Company does not expect any material adverse effects, the Company can
provide no assurance that these suppliers will resolve all of their Year 2000
issues on a timely basis. The Company will continue to monitor this process
and revise its expectations as needed.
Risks: While the Company is taking steps in all areas discussed above, there
can be no assurance that all Year 2000 issues will be entirely resolved. Due
to this inherent uncertainty, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, there could be
interruptions or failures that would materially impact receiving,
manufacturing, and other normal business operations. The Year 2000 Project is
expected to significantly reduce the potential of any such material adverse
effects. Further, the Year 2000 Project includes the development of
contingency plans for those systems that are critical to daily operations.
These contingency plans are in process and are expected to be complete by
Fall 1999.
-15-
<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Readers are cautioned that the forward-looking statements contained in the
Year 2000 Issues and Conversion should be read in conjunction with the
Company's disclosures under the heading: "Safe Harbor Statement'.
SAFE HARBOR STATEMENT:
STATEMENTS IN THIS REPORT THAT ARE NOT STRICTLY HISTORICAL ARE "FORWARD-LOOKING"
STATEMENTS WHICH SHOULD BE CONSIDERED AS SUBJECT TO THE MANY UNCERTAINTIES THAT
EXIST IN THE COMPANY'S OPERATIONS AND BUSINESS ENVIRONMENT. THESE UNCERTAINTIES,
WHICH INCLUDE ECONOMIC AND CURRENCY CONDITIONS, MARKET DEMAND AND PRICING,
COMPETITIVE AND COST FACTORS, AND THE LIKE, ARE SET FORTH IN THE FLOW
INTERNATIONAL CORPORATION FORM 10-K REPORT FOR 1998 FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
-16-
<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is party to various legal actions incident to
the normal operations of its business, none of which is believed to be
material to the financial condition of the Company.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Stockholders on August
26, 1998. At the meeting three directors, Ron D. Barbaro, Arlen I. Prentice
and J. Michael Ribaudo were elected to three-year terms ending with the 2001
Annual Meeting of Stockholders receiving, respectively, 14,206,495,
14,198,427, and 14,197,638 votes in favor and 192,998, 201,066 and 201,855
votes withheld. A proposal to approve the change of the Company's state of
incorporation from Delaware to Washington received 10,299,406 votes for
approval, 1,245,525 votes against and 148,068 shares abstained.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
-17-
<PAGE>
FLOW INTERNATIONAL CORPORATION
------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOW INTERNATIONAL CORPORATION
Date: December 11, 1998 /s/ Ronald W. Tarrant
---------------------
Ronald W. Tarrant
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: December 11, 1998 /s/ Stephen D. Reichenbach
--------------------------
Stephen D. Reichenbach
Executive Vice President, Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
-18-
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