Flow International Corp. Reports Operating Results (10-Q)
Flow International Corp. has a market cap of $111.8 million; its shares were traded at around $2.38 with and P/S ratio of 0.6. FLOW is in the portfolios of Arnold Schneider of Schneider Capital Management, Chuck Royce of Royce& Associates.
Highlight of Business Operations: In fiscal year 2010, we terminated our option to acquire OMAX following a thorough investigation of financing alternatives to complete the merger and unsuccessful attempts to negotiate a lower purchase price with OMAX. Pursuant to the terms of the amended Merger Agreement and the Settlement and Cross Licensing Agreement, the $15 million held in escrow was released to OMAX. We recorded a $6 million charge pursuant to the provisions of the amended Merger Agreement in the first quarter of fiscal year 2010, net of a $2.8 million discount as the two subordinated notes issued to OMAX were at a stated interest rate of 2%, which is below our incremental borrowing rate. This discount is being amortized as interest expense through the maturity of the subordinated notes in August 2013.
Sales for the three months ended July 31, 2010 increased $8.8 million or 23% over the prior year period primarily driven by improved sales volume due to the stabilizing of the macroeconomic environment. The increase was in our Standard segment, which improved $12.5 million or 44% over the prior year period. All geographies in our Standard segment experienced double digit growth over the prior year comparative period, which represented our lowest point during the recession. This increase in our Standard segment over the prior year period was offset by an anticipated decrease of $3.6 million or 39% in our Advanced segment sales based on the timing of contract awards and our manufacturing and installation schedules.
Gross margin for the three months ended July 31, 2010 amounted to $17.5 million or 43% of sales compared to $10.6 million or 37% of sales in the prior year comparative period. Generally, the comparison of gross margin rates in this segment will vary period over period based on changes in our product sales mix and prices and levels of production volume. The improvement of our margins in the current three month period over the prior year comparative period was primarily attributable to product mix, and to a lesser extent, better fixed-cost absorption and manufacturing efficiencies based on higher production volume.
Gross margin for the three months ended July 31, 2010 amounted to $1.9 million or 33% of sales compared to $3.4 million or 36% of sales in the prior year comparative period. The decrease in gross margin as a percentage of sales when compared to the prior year comparative period was attributable to product mix as well as updates to certain estimated costs to complete.
Our interest expense, net was $392,000 and $924,000 for the respective three months ended July 31, 2010 and 2009. Our interest expense primarily consists of imputed interest on two subordinated notes that were issued at below market interest rate, amortization of deferred debt financing fees and interest charges on the used and unused portion of our senior credit facility as well as outstanding letters of credit. The decrease in net interest expense in the current quarter when compared to the prior year same period was primarily as a result of significantly lower balances outstanding on our senior credit facility as well as lower balances in outstanding standby letters of credit. Further, the prior year comparative period included a $253,000 write-off of deferred financing fees as a result of reducing our available borrowing capacity by 50%.
During the three months ended July 31, 2010, we recorded Other Income, net of $292,000 compared to $502,000 for the three months ended July 31, 2009. These changes primarily resulted from the fluctuation in realized and unrealized foreign exchange gains and losses on revaluation of third party and intercompany settled and unsettled balances whose payment is anticipated in the foreseeable future.
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