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Flow International Corporation (FLOW)

F2Q 2013 Earnings Call

December 6, 2012 5:00 p.m. EST

Executives

John Leness – General Counsel and Corporate Secretary

Charlie Brown – President and CEO

Allen Hsieh – CFO

Analysts

Eric Stine – Craig Hallum

Joe Maxa – Dougherty & Co.

[Joe Best] – ROTH Capital Partners

Tim Fronda – Sidoti & Co.

Bob Johnson – Satuit Capital

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Flow International fiscal 2013 second quarter financial results conference call.

During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions]. This conference is being recorded today, December 6, 2012.

I would now like to turn the conference over to Mr. John Leness with Flow International. Please go ahead, sir.

John Leness

I'm Flow's Secretary and General Counsel. With me this afternoon are Charlie Brown, both President and CEO, and Allen Hsieh, Chief Financial Officer.

This call will include forward-looking statement defined by the Private Securities Litigation Reform Act of 1995. During the call we will discuss selected financial results. Any statements that are future results, including trends, risks and plans, is considered as forward-looking. These are based on current expectations only. Actual results may differ from these forward-looking statements and are subject to risks and uncertainties as are detailed in our filings with the Securities and Exchange Commission. Flow takes no obligation to update any forward-looking statement whether as a result of new information, future events or otherwise.

I will now turn the call over to Charlie.

Charlie Brown

Thank you for joining us today for our discussion of Flow's results for the second quarter of fiscal year 2013. For the quarter, revenue was $67 million, yet another quarterly record. This is also an increase of 4% from the prior year comprised of 6% organic growth, offset by a 2% foreign exchange impact. The growth versus year ago came from most regions in our Standards business including our European theater which grew in local currency by more than 15% year over year.

In our Advanced segment, we are very pleased to report that in the past four months we have received a variety of commitments for orders totaling more than $30 million. We also reported one-time charges of $1.1 million in the quarter related to generating revenue in the segment, which I will explain in more detail in a moment.

Absent these charges, the company generated operating income of $5.1 million or 7.5% of sales and $0.06 of earnings per share. This compares to prior-year results of $5.2 million or 8% of sales and $0.06 of earnings per share. On a reported basis including the charge, operating income for the quarter came in at $4 million or 6% of sales with EPS of $0.04.

Breaking down our revenue, total Standards segment revenue also reached another all-time high, growing 7% versus the prior-year quarter to $63.2 million. Excluding the negative impact of foreign exchange rate, revenue growth in this segment was even stronger at 9%. Within this segment, Standard Systems revenue in Q2 reached its own new record level at $40.3 million, a 4% increase from the prior-year quarter. Our spares revenue was also the highest ever at $23 million, which is a 13% increase year over year and up 4% sequentially from Q1. The overall -- this overall growth came from some carryover promotional activity that started in Q1 as well as serving more installed systems.

Revenue from our Advanced segment at $3.8 million represented less than 6% of total sales in the quarter, was down 9% sequentially from Q1 and 28% from prior year. As we have previously discussed, annually this is roughly a $20 million to $25 million business for us, comprised of individual machines that often sell for $7 million or $8 million, and they're accounted for on a percent of completion basis. This brings a lot of variability to quarterly reporting in this small subset of Flow. Recent quarterly results have been poor in this segment as we are growing through a period of low revenue and associated low gross margin.

We've been working hard to land the orders we need to be successful in this segment. Recently we have made significant progress towards increasing our order book for this business so we can return to much more consistent levels of performance. Over the past four months or so, we've received commitments that in total exceed $30 million. This includes the $10 million orders that we discussed in our last call. Revenues from these projects should begin to be recognized in Q4 of this fiscal year, spanning five to six quarters in total.

As I mentioned previously, we had two items in the quarter totaling $1.1 million which negatively impacted our gross profit for this segment and our operating results overall. Both of these items are related to revenue-generating activities. First item, worth $700,000, helps secure a future order commitment. As part of the normal course of negotiating [inaudible] with an existing customer, we arrived at a discount off of list price similar to what's experienced in the aerospace industry. As part of the negotiation, we credited the discount against our existing receivable balance with this customer. The accounting rules require that we report this as a reduction to revenue in the current quarter.

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