KENT, Wash., Dec. 5 /PRNewswire-FirstCall/ -- Flow International
Corporation (Nasdaq: FLOW), the world's leading supplier of
ultrahigh-pressure waterjet products, today issued a letter from President
and CEO Stephen R. Light to the financial community, updating investors on
the conditions affecting Flow's performance as it completes the second
quarter of fiscal 2007. The text of that letter follows:
December 4, 2006
A message from Stephen Light, Flow International President and CEO
This letter is an interim update on conditions affecting the company's
performance. As you know from our recently filed Form 8-K, investors are
instructed not to rely upon our most recent fiscal 2006 Form 10-K as we
expect to file a restatement for fiscal 2006 which will increase revenue
and earnings. The company is also a delinquent filer for the first quarter
of fiscal 2007 and will likely be a delinquent filer for the second fiscal
quarter as well. This letter update to investors does not replace or in any
way intend to supplant the company's obligation to file financial reports
for the period but is intended to provide a market and business condition
overview while preparation of the obligatory filing documents is underway.
Special Investigation Update
The Board of Directors instructed the Audit Committee of the Board of
Directors to investigate allegations concerning revenue recognition errors
at Flow's Taiwan-based Flow Asia Corporation and any related matters. The
Audit Committee appointed independent counsel to conduct the investigation
and an independent accounting firm was retained by the independent counsel.
The investigation began promptly following the receipt of the allegations
in early September and is nearing completion. The investigation has been
very time consuming as the investigators have reviewed many thousands of
documents in Mandarin and English, and have conducted extensive interviews
of the Company and Flow Asia management teams and selected customers, all
of which required considerable time. The investigators have estimated that
approximately $2.0 million of revenue recognition was intentionally and
inappropriately delayed from FY 2006 Q4 into Fiscal 2007 by members of Flow
Asia's management team. The investigators are performing additional reviews
and testing to assure the completeness of the investigation, including
review of revenue transactions other than those originally identified, as
well as a broader review of certain financial accounts, including certain
expense and inventory accounting. The individuals responsible for this
willful misrepresentation have been dismissed by the Company effective
November 28, 2006. No involvement by persons outside of Flow Asia's Taiwan
operation has been found.
The Company previously recognized weaknesses in its financial controls
over revenue recognition as a component of its SOX 404 review. While the
new controls being implemented did not originally contemplate the collusion
of members of the management team at a specific location, we're adding
additional training, audits and controls to reduce the chance such a
situation could reoccur.
The Company will prepare the requisite filings as quickly as possible
and hopes to be current with its SEC filings within a reasonable time
period. PIPE investors were advised by separate communication that the S-1
share registration previously filed has "gone stale' effective November 22,
2006, and cannot be relied upon for share sales. Under the terms of the
PIPE Agreement, the Company has forty (40) 'black out' days, which would
expire January 23, 2007 in which to file a current Form S-1 and for the SEC
to approve it, before any penalties would be owed to the PIPE investors. I
will maintain close communication with the PIPE investors as this situation
progresses.
Company representatives met with NASDAQ regulators in response to their
threatened delisting action and explained to the extent possible given the
confidential nature of the ongoing special investigation, the issues
surrounding our delinquent filings. The Company submitted supplemental
materials to the NASDAQ including our forecasted schedule for completing
our filings and returning to compliant status. On Thursday, November 30th,
NASDAQ advised the Company that its request for an extension had been
denied and that trading in the Company's shares on NASDAQ would be
suspended before the opening of business on Monday, December 4, 2006. On
Friday, December 1, 2006, the Company filed a request for reconsideration
and that same day NASDAQ advised the Company that it would stay the
suspension pending the regulators' consideration of the Company's request
for reconsideration, which decision will be made within fifteen days of the
original decision. The Company is now able to provide NASDAQ with
additional materials if desired in support of its request as the
investigators have made their first comprehensive report to the Board of
Directors. The Company remains hopeful that NASDAQ will grant the Company
additional time to make the requisite filings necessary to come back into
compliance. In the event that trading in the company's shares is suspended
on NASDAQ, the Company expects that the Company's common stock will be
quoted on the Pink Sheets so that trading in its shares will continue. As
soon as the investigation is complete the Company will do everything
possible to expedite completion of its filings and again be in compliance
with NASDAQ regulations, so that even if trading is suspended on NASDAQ for
a period of time, the Company will be able to apply to have trading in its
shares resumed.
Following completion of our filings we will schedule an investor
teleconference to review our financial performance and business outlook.
Served Market Conditions
Strong market conditions continue in North America, Europe and Latin
America for standard and application-specific waterjet cutting machines.
The general health of our broad domestic markets is in contrast to the
abrupt slowdown in new housing permits, an area where Flow's products are
applied to manufacture counter tops. We are monitoring this segment closely
as counter tops are installed late in the home building process. Leaders in
this market tell us increased remodeling activity and our machine's
productivity advantages are the justification for their continued strong
capital investment. Year to date, domestic sales leads are up 49% over the
prior non- IMTS year driven by adoption of our new 87K HyperPressure(TM)
system, and the seasonal concentration of trade shows (Chicago, Las Vegas,
Atlanta). Absent the show 'bump', sales leads as of August YTD, are up 11%
over the prior year.
Asia, Japan and the Applications Group are all experiencing some
softness. I believe the Asia/Japan situation is more the result of
organizational turmoil related to the special investigation than market
softness, while the Applications issue is partially related to our
reassignment of one of our senior executives from Applications to Asia, and
partially to ongoing US auto industry issues. We've recruited additional
sales resources for Applications focused on non-automotive waterjet
applications. Interest in ground based composite cutting machines continues
strong.
Surface preparation/Industrial Cleaning opportunities have improved
versus fiscal 2006. For example, we've returned to the highway lane stripe
removal market supplying our new high productivity 55,000 psi. diesel Husky
pump. The 55,000 psi. pump enables twice the stripe removal per hour
creating significant productivity savings.
Our aerospace business remains robust in spite of the much publicized
delays in the Airbus A-350 which resulted in a contract cancellation
earlier in the year. We've learned that Boeing directed its Japanese B-787
suppliers to facilitate for ten (10) aircraft per month, triple their
present 3 1/2 per month capacity. Consequently, we forecast at least $30
million in new B-787 bookings between FY '07 and '08 with revenue
recognized by late FY '08.
Meanwhile Airbus is making progress on their formally approved new A-
350XWB (B-787 competitor) aircraft. Latest media announcements indicate a
2013 commercial introduction, two years later then originally scheduled. I
doubt we'll receive anything more from Airbus for six months, and no
revenue in FY '07 beyond the cancelled contract for previously ordered
machines.
Good interest continues in the NanoJet(TM) semiconductor singulation
system. Flow Asia's sales team is demonstrating the system frequently to
new companies. Utilization of installed machines continues very high
supporting strong aftermarket sales. We've received an order for our first
NanoJet(TM) Plus machine which delivers higher production output.
Globally, the aftermarket remains strong and more than 10% above YTD
fiscal 2006, excluding abrasive garnet sales, on the strength of high
equipment utilization rates and fleet expansion. We've introduced our
on-line parts store to Europe and are experiencing faster customer adoption
than we experienced in the U.S. We believe this higher parts consumption is
also being driven by share recovery from will-fitters as cost increases for
specialty materials have caused will-fitter parts to increase in price.
New Product Introductions
Our new 87,000 psi HyperPressure(TM)system, is being delivered to
production customers. Early feedback is strongly positive. Customers have
remarked positively about cutting speed and reduced noise. These systems
incorporate advanced pump seal technologies to extend component life and
reduce maintenance time.
Many investors either saw or read about the Sodick Hybridwire(TM) EDM-
waterjet combination machine shown at IMTS. The machine was displayed at
the Japanese Industrial Machine Tool Forum (JIMTOF) in November where it
met with similar acclaim. Flow and Sodick are collaborating to develop an
accelerated product introduction plan under a bi-lateral exclusivity
agreement. I continue to be very enthusiastic about the machine's
prospects, as is Sodick who expects to sell five machines per month when
production is launched.
Organization Development
Earlier this year the Company issued a Form 8K announcing its intention
to add approximately ninety employees during fiscal 2007. We're making
progress and have added numerous personnel in support of our sales,
marketing and new product development initiatives and to improve the
financial control environment. It is unlikely we'll fill all of the open
positions by Q4 fiscal 2007 so we'll continue this work into fiscal 2008.
In a move aimed at continuously improving our performance in the
rapidly growing Americas waterjet market, Jeff Hohman has been added to my
staff as Executive Vice President and General Manager-Waterjet Americas.
Jeff joins Flow from the Idex Corporation where he was President of the
MicroPump division. Jeff's career focus has been the management of
companies who develop and market numerous types of fluid pumps so his skill
set aligns directly with Flow's businesses. In his new role, Jeff assumes
P&L responsibility for our waterjet cutting and industrial cleaning
businesses in
the Americas. Further, Jeff's arrival will enable me to devote more
time to developing additional growth paths for the company.
Major Investment Projects
When we spoke with investors during Flow's July 2006 investor
teleconference, we announced that we were making investments to improve our
information technology platform. These investments, of approximately $11
million over two years, will upgrade our systems architecture, our
enterprise resource planning (ERP) systems, and our IT infrastructure. This
will allow us to further improve our controls over financial reporting,
improve our visibility into world-wide operations, and lower operations and
compliance costs. Our improved ability to act globally with enhanced
centralized controls addresses many of the contributing factors to our
recurring financial reporting issues, while simultaneously enabling us to
better utilize our global resources to improve asset utilization and
productivity. While we would like to have these systems in place
immediately, the size and scope of the projects means that it will take
approximately two years before they are fully operational.
Summary and Responsibility
Our products continue to displace older cutting and cleaning
technologies because of their inherent flexibility and productivity
advantages. Our markets are generally quite healthy, our new and legacy
products are selling well, and our customers in all served markets are
utilizing their equipment more than last year. The most recent economic
forecasts I've reviewed give me reasons to believe our market's health will
continue for at least the next several years. I remain convinced that the
Company's strategies are appropriate and that we're on track to achieve our
long term objectives.
Stephen R. Light, President and CEO
About Flow International
Flow International Corporation is the world's leading developer and
manufacturer of ultrahigh-pressure waterjet cutting technology to
industries including automotive, aerospace, job shop, surface preparation,
and more. For more information, visit http://www.flowcorp.com .
This letter contains forward-looking statements relating to future
events or future financial performance that involve risks and
uncertainties. The words "believe," "expect," "intend," "anticipate,"
variations of such words and similar expressions identify forward-looking
statements but their absence does not mean that the statement is not
forward-looking. These statements include, but are not limited to: the
filing of a restatement for fiscal 2006 increasing revenue and earnings,
the completion of the special investigation, adding training, audits and
controls, the plan to prepare and file financial reports and become current
in SEC filings as quickly as possible, the plan to communicate with PIPE
investors, the quotation of the Company's shares on the Pink Sheets,
continued strength in markets for the Company's products, the forecasts
relating to 787 bookings and Airbus orders, the prospects for Sodick
Hybridwire(TM) EDM-waterjet combination machine and Sodick's forecasts of
sales, and the rapid adoption of the Company's on line parts store, the
likelihood that open positions will be filled, and improvements based on
enhanced centralized controls. These statements are only predictions and
actual results could differ materially from those anticipated in these
statements based on a number of risk factors, including those set forth in
the April 30, 2006 Flow International Corporation Form 10-K Report filed
with the Securities and Exchange Commission. Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as
of the date of this letter.
Contact: Flow Investor Relations
253-813-3286
SOURCE Flow International Corporation
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Related links:
http://www.flowcorp.com
CONTACT:
Flow Investor Relations, +1-253-813-3286
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