Flow International Corporation F3Q08 (Qtr End 01/31/08) Earnings Call Transcript

Mar. 6.08 | About: Flow International (FLOW-OLD)

Flow International Corporation (NASDAQ:FLOW-OLD)

F3Q08 Earnings Call

March 6, 2008 1:00 pm ET

Executives

Charles M. Brown – President, Chief Executive Officer, Director

Douglas P. Fletcher – Chief Financial Officer, Vice President

John S. Leness – General Counsel, Corporate Secretary

Analysts

Sid Parakh – McAdams Wright Regan

Chuck Murphy – Sidoti and Company

Chad Bennett – Northland Securities

Alan Robinson – RBC Capital Markets

Richard Hoss – Roth Capital Partners LLC.

Greg Eisen – ICM Asset Management

J.D. Pagent

Chad Webson – Paradigm Capital

Operator

Ladies and gentlemen thank you for standing by and welcome to Flow International’s Third Quarter conference call. (Operator Instructions) I will now like to turn the conference over to John Leness, Secretary and General Counsel. Please go ahead sir.

John Leness

Thank you. I’m John Leness. With me this morning are Charlie Brown, Flow’s President and CEO, and Doug Fletcher, Chief Financial Officer.

This call will include forward looking statements as defined by the Private Securities Litigation Act of 1995. During the call we will provide selected financial and performance results for the third quarter of fiscal 2008. Any statements about future events, trends, risks and plans should be 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 statements whether as the result of new information, future events or otherwise.

With that introduction I will turn the call over to Charlie Brown.

Charlie Brown

Thank you John. Good afternoon ladies and gentlemen and thank you for joining us. Today we released our results and filed a 10Q report for the third quarter of our fiscal year 2008. We are pleased to report an excellent quarter in both revenue growth and improved profitability.

For the third quarter, ending January 31, our revenues were $66.3 million representing 18% growth versus last year including a 17% growth in system sales and a 22% growth in spares sales.

Breaking down the system sales further, our core standard systems revenue for North America, which we track closely, was up 18% for the quarter. The trailing fourth quarter growth rate for this business was 15%. Our world-leading 87,000 psi or 87K Hyper-pressure waterjet systems are leading the way to this consistent growth continuing to exceed our highest expectations. This proprietary product line remains unmatched by any competitor worldwide.

Our standard system sales in Europe and Latin America combined were up over 36% on increased penetration in all markets. In local currencies our standard system sales in Europe increased by 16% and far more than that in Latin America.

These results were achieved even though the 87K product line is still very early in its ramp up in those markups.

Our aerospace business had minimal growth in the quarter but it is beginning to pick up momentum and we expect sequential growth in Q4. Even though delays in some major commercial airline programs have caused orders for our product to be pushed out we continue to be optimistic about our aerospace business and we expect several large orders will lead to improved revenue levels in the coming quarters but the specific timing of these orders is difficult to predict.

In Asia we have also begun to see improvement in our business. Revenues were up 72% from last quarter to a level comparable to last year’s third quarter. In our last earnings call we said we believed that sales had bottomed out in this region and this has proven to be true. To restore this region to consistent strong growth we recognized that we needed to strengthen our management team and take actions to improve our competitive position.

In that light I am happy to announce that Brad [Hillem] has joined Flow this week to be the managing director of our Asia business. Brad will be located in the region and brings over 20 years of international experience with deep background in Asia and with leading growth businesses.

As announced six months ago, we have narrowed the focus of our applications business to exclude any non-waterjet related automation projects going forward. This business grew 4% in local currency during the quarter and we have shipped out of the factory the last non-waterjet order.

Our consumables, or spare parts business, grew 22% for the quarter with performance consistent across all segments and geographies. This recurring revenue stream consistently represents more than ¼ of our business and our online ordering capability is becoming widely adopted by our customers.

In total our 18% growth rate for the quarter once again reflects our diverse revenue stream. Standard systems up 18% in North America and 36% in Europe and Latin America. Spare parts up 22% worldwide. Asia was flat but showing promise and aerospace was flat but poised for a pick up.

It is this diverse revenue stream that continues to give us confidence in our ability to consistently grow our top line revenues at least 10% annually.

Our year-to-date revenue growth rate stands at 12% and it now appears that we should be at least at this level for the full year.

Now I’ll turn it over to Doug for further financial commentary.

Doug Fletcher

Thanks Charlie. As Charlie mentioned we had good results in the quarter on strong revenue growth and improved operating leverage.

Let me touch briefly on backlog. Our backlog as of January 31 was $36 million, which is up from $34 million at the end of the last quarter and $31 million at the end of the last fiscal year.

Turning to net income, net income for the quarter was $5.9 million or 16 cents per basic and fully diluted income per share. This compares to net income for the prior year period of $2 million or 5 cents per basic and fully diluted earnings per share.

Strong top line performance was supported by improved expense management and lower professional fees.

Gross profit for the quarter was up $4.2 million or 18% on higher sales volumes.

Margins for the quarter were 42.2%, down slightly from the 42.4% in the prior year quarter.

After we hit a low point in our first fiscal quarter of this year our margins have now improved 200 basis points.

As we discussed in the past few quarters we have taken steps to improve our global supply chain group and the efficiency of our global manufacturing operations. The current quarter performance is evidence that we are on the right track and we expect that our gross margins will improve further in the fourth quarter.

It is important to note, however, that our margins are impacted by the mix of our quarterly sales and can be expected to vary by quarter.

On an overall basis, SG&A expenses were $19.2 million in the quarter, down 10% over the prior year. Sales and marketing expenses were up 10% but excluding bad debt reserves taken on two large projects in our applications segment, sales and marketing expenses grew only 6% as we continue to better leverage our target investment in customer facing resources.

Research and engineering expenses were down 11% due to the timing of new product launches and improved expense management.

Our general administrative expenses were down $2.8 million or 31% due mainly to lower professional fees and the year-over-year impact of the Asian investigations that were concluded in March 2007.

The actions taken so far have allowed us to better leverage the operating expense phase while still providing the necessary level of investment to fuel our growth. Overall we expect to hold operating expenses for all of fiscal 2008 to below last years $87 million.

Operating profit for the quarter was $8.8 million and operating margin was 13.3%. This was more than triple the prior year quarters operating profit of $2.4 million and far exceeded last year’s 4.4% margin.

We continue to hold our previous projections that the full year operating profit should be 3-4 times higher than fiscal 2007.

In the third quarter we recorded a tax expense of $2.5 million which was 30% of our pretax income. This was a higher rate than we mentioned last quarter due to a higher than expected profits that we have generated in certain foreign countries such as Germany.

Turning to the balance sheet, our balance sheet remains strong with a net cash position of $16.3 million as of January 31. We had $20.4 million in cash and short-term investments of which $17.3 million was held by divisions outside the United States.

Despite strong cash flow from operations during the quarter our net cash position declined to $6.4 million dollar payments made for the pending OMAX acquisition, $4.9 million in cash payments under the prior CEO’s contract amendment, $2.2 million in capital expenditures and increases in working capital.

We experienced a large increase in accounts receivable during the quarter due mainly to extended payment terms on $4 million government contract.

As of January 31 we had total debt outstanding of $4.1 million primarily mortgage and short-term financing in Taiwan which is at a very favorable interest rate.

Under our $45 million domestic credit agreement we had $43 million of unused line of credit available. Net of $1.9 million in outstanding letters of credit.

With that I’ll return the call back to Charlie.

Charlie Brown

Thanks Doug. I want to touch briefly on our pending OMAX acquisition. As we announced on February 6, 2008, we received a request for additional information and documentary material from the Federal Trade Commission in connection with their review of the proposed acquisition. We are cooperating fully with the FTC to provide the necessary information and we expect to complete the transaction. Beyond that we cannot comment further at this time.

We received many questions regarding what impact the U.S. economic slow down may have on our business. The answer comes back to our balanced portfolio. As shown repeatedly in our results, our revenues are derived from a variety of countries and a variety of end markets. Yes, in Q3 we sold fewer machines than we have in prior quarters to customers that primarily serve the residential new construction market in the U.S. However, that is not our only end market. Other parts of the U.S. market are also less robust currently than in times past. However, the U.S. is not our only growth market. We do not pretend to be recession proof worldwide, but on balance we consistently come back to our belief that this business can sustain annual growth and revenues of 10% and EBITD of 20%.

I will now turn it back over to the operator to queue up the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Sid Parakh of McAdams Wright Regan. Please go ahead.

Sid Parakh

Good morning gentlemen. Congratulations on the great quarter. Can you elaborate a little more about the economic impact? One of the things I was trying to get to was what would revenues have looked like if you don’t account for the foreign exchange currency impact….overall revenue growth?

Doug Fletcher

Overall revenue growth for the quarter was 18% Sid. If you eliminate the foreign currency impact year-over-year revenue’s would have been up 13%.

Sid Parakh

13% okay. So you have talked about how you have a broad base of products and market, but longer term given all the headwinds we have do you have any concerns in any specific areas outside of the ones you have mentioned?

Charlie Brown

I come back to the balanced portfolio approach. We have rotating concerns through our markets. If you just look at the last 2-3 quarters we have had certain parts of our portfolio up and certain parts down. It seems to be the nature of this business that tends to rotate through certain areas. As I mentioned, Asia and aerospace as opposed to our core systems business in some of our larger markets. I have I guess a realistic view that there will be soft pockets. I’m not going to sit here and predict where those soft pockets will be but that is the history of the business. That is the future we face into. Despite all that, like I said, we still feel good about our 10% revenue growth, 20% EBITD growth on an annual basis going forward.

Sid Parakh

Okay a question on Asia. The sequential increase was pretty significant. It was up 72%. Were there any one time events or items or should we reconsider this as maybe the base case for forecast future revenue?

Charlie Brown

I guess I would kind of be in the middle there. I wouldn’t say that we should expect that Asia is going to snap back or have some kind of step function improvement in the future because as we’ve said in the past if we go back to the situation that has evolved we are coming from a situation where 1-2 years ago there was a lot of volume on the Nanojet – the flash memory cutting machine that we have and sold a lot of – and management in the region at that time shifted all the resources to that very, very strong opportunity that presented itself. The opportunity costs of that shift was in the basic, normal day-to-day more consistent job shop type of business. So it has taken us a while to build that momentum back and get those leads going and follow up on those leads and turn them into orders. So that’s what you’re seeing as this is starting to get a little bit of traction. But I would not present it as a continuing leapfrog type of approach going forward. We feel that it is improving and it is headed in the right direction there.

Sid Parakh

And this quarter did not have any Nanojet revenues – or it did?

Doug Fletcher

No, I don’t believe it had any other than spare parts.

Sid Parakh

And last question from me. Can you talk a little bit about Sodick and how that is progressing?

Charlie Brown

Yes. That continues to be a very good relationship for us. It continues to be a very productive one. There is a fair amount of missionary sales that their sales team has to do in the field of getting out and telling the story about this entirely new product which is a hybrid between waterjet and an EDM cutting machine. They are successful in getting good conversion and it is something that is a long term effort that will continue to ramp up over time. So, it’s not an astounding piece of our portfolio yet but the technology is very sound. We’ve met all the dates that we’re committed to there and product is being purchased. It is part of our revenue stream now. It is not just a development process.

Sid Parakh

But it’s not a significant piece yet?

Charlie Brown

No. Not yet.

Sid Parakh

Alright. Great. Thank you gentlemen.

Operator

Thank you. The next question comes from the line of Chuck Murphy with Sidoti and Company. Please go ahead.

Chuck Murphy

Good morning guys. Just wondering – Charlie you mentioned in the press release how waterjets are stealing share from the other types of machine tools. Do you think there is a specific one, whether it be like a plasma cutter or lathe, that you are particularly well suited to take share from?

Doug Fletcher

Really I pause because it really depends on the application. There are certain cutters, as you know, that for certain types of cutters waterjets are inferior. If it is thin sheet metal a laser is going to be a more efficient, cost-effective solution. Think of it this way – we are taking share from the next purchase. We’re not going in and displacing some job shop who has three lasers. They are not getting rid of one to take on a waterjet. As they grow they realize the flexibility of different types of materials they can cut with a waterjet. They realize the expansion it can give their business and so they are adding their next machine as a waterjet. So it’s kind of hard to say where we are taking share from because they are really expanding their business into areas that a variety of cutting methodologies couldn’t do for them.

Chuck Murphy

I got ya. Similar to the last question asking about Asia’s big jump in sales, why has Asia been so erratic over the past year? Do they typically have larger orders all at one time than the other regions?

Doug Fletcher

No, not necessarily. I think it goes back to really fourth quarter 2006 and then first quarter fiscal 2007. You had a lot of semiconductor shipments in those quarters so that created lumpiness in those periods. I would say the growth in this quarter was more broad based. It was not one specific large order that did it. I do want to caution, however, that as Charlie mentioned one quarter doesn’t create a trend and we do have some up and down movement between quarters. But I would say this quarter versus the last quarter of 2006 and first quarter of 2007 was much more a broad based product sales than any one large order.

Chuck Murphy

Okay. As far as seasonality, historically the fourth quarter has been your strongest. That wasn’t necessarily the case last year. How should we look at seasonality going forward?

Doug Fletcher

Well I think as I have mentioned over the last few quarters, 2-3 years ago there was a clear seasonality to this business. We haven’t seen that. We didn’t see that last year. As you remember there was a sequential drop between Q3 and Q4. Some people thought that was and we’ve heard comments on that. We’re seeing less seasonality in our business so I can’t say that would be the case this year.

Chuck Murphy

My last question and then I’ll turn it over…what was the cash flow from operations?

Doug Fletcher

For the quarter?

Chuck Murphy

Yes.

Doug Fletcher

Chuck I will have to get back to you. I don’t have it right in front of me.

Chuck Murphy

I’ll turn it over. Thanks.

Operator

The next question comes from the line of Chad Bennet with Northland Securities. Please go ahead.

Chad Bennett

Thank you. Good quarter guys. Just a quick question. Charlie, can you take a stab at what you think just the overall waterjet market has grown at in the last quarter – maybe the last six months – not only here in North America but worldwide. However you want to phrase it. I’d love to get your thoughts on what you think the market growth is.

Charlie Brown

That’s a good question and I ask it periodically internally as well. Unfortunately we don’t have a database we can turn to worldwide that gives us that information so there is a lot of triangulating and guessing that goes into it. It is certainly a double-digit growth rate. The question that is probably behind your question is it growing faster than we are? It’s hard to say. I don’t think we’re abnormal in the market by growing in the teens. We think there are probably others that are growing that fast. I would say that the market growth rate is probably in the same range. Maybe a little lower in some markets. Maybe a little higher in some markets than our growth rate.

Chad Bennett

Okay. You’re right on the question behind the question. I have another one actually embedded there also. With the 87K, especially in the U.S. market, can you remind us again for one when you introduced that system and with the success and the competitive lead you have there on the technology side I guess you should be growing a little bit faster than the market I would assume because of that competitive edge and can you give a sense of – I know it is somewhat proprietary – but I assume we’re over kind of the half-way mark in terms of units shipped at least domestically with that product. Maybe you don’t want to touch that piece but anything you want to say with respect to that would be great.

Doug Fletcher

The 87K was launched last October – INTS a year-and-a-half ago and that was North America and the worldwide launch took place officially in Europe last fall and South America probably three months ago. So that is sort of the ramp up. Asia is just starting to launch it now. That’s sort of the worldwide phasing that we’ve gone through. In terms of…yes it is a leadership position from the technology. We’ve discussed that at length. We do not disclose any more as we mentioned last call because it has become such a significant portion of our business and especially where it has been in the market the longest. We don’t disclose how much of our business it is for competitive reasons.

The point that you make though about the growth that it gives us as related to your first question in terms of market share and then it comes up as what market are we looking at, units or dollars, and what kind of market share are we looking at – units or dollars? Because we do get a premium for the 87K. So that’s helping our dollar share and I would say that our dollar market share is outpacing the market. However there are low end units that are being sold in markets around the world at a very low price point so that might be driving the unit growth at a little different rate. Fortunately PNL’s are done on dollars, not on units, so you can see the results of that this quarter.

Chad Bennett

Okay got it. So there could be a little disparity there.

John Leness

Yes.

Chad Bennett

Alright. And then can you remind us again…in the North American market you typically give a rough estimate of end-market breakdown. Can you give us an end-market breakdown in North America?

John Leness

Breakdown of what?

Chad Bennett

Percentage job shops, percentage….all your different end markets.

John Leness

In terms of our sales end of those end-markets?

Chad Bennett

Yes.

John Leness

I appreciate your intent of trying to understand more about our business and we want to be able to help people understand more about our business but we haven’t really been breaking it down in detail lately by those end-markets. What we really want to get back to is an understanding of our broad portfolio both end-market wise and geographically and how the breadth of that portfolio in those two dimensions gives us the opportunity for strong pieces to offset weaker pieces and gets us back to that expectation that we have for ourselves of annualized revenue growth of 10% per year.

Chuck Murphy

Okay. Just a couple of questions, hopefully questions that can be answered related to OMAX. First of all, has the timing changed on potential deal close? Second of all in light of the credit environment out there – any qualitative remarks related to access to capital these days?

John Leness

Yeah. We’re not obviously making a whole lot of comments even on the timing of it. When we announced the deal we were confident of the deal going through and we’re still confident of the deal going through. So we’ll just take that at face value. The credit markets….I’ll let Doug address that one.

Doug Fletcher

Obviously there is a lot of news in the credit markets. I assume your question is pointed at our abilities to continue to finance that transaction. In the area of the bank market that is still in good shape is the prorate bank market in this size deal structure and this margin of deal structure. So we’re not seeing anything that would lead us to believe we’ll have any issue. As we’ve mentioned before we’re not putting a lot of leverage on to take on this acquisition so right now we have no indication we’ll have any problem with closing the financing.

Chuck Murphy

Good. So you are in good shape there.

Doug Fletcher

Yes.

Chuck Murphy

Okay. Thanks guys. That’s all I have.

Operator

Thank you. Ladies and gentlemen if there are any other questions please press the * followed by the 1 at this time. If you are on a speakerphone you’ll need to pick up the handset before making your selection. One moment please for the next question.

The next question comes from the line of Alan Robinson with Royal Bank of Canada. Please go ahead.

Alan Robinson

Good morning. I have a question regarding consumables. You delivered 22% increase in consumable sales in the quarter. Now this seems to be a higher growth rate than that of the machine in-store base. Can you give us some color as to what is going on there? Are there any significant price inflation in the prices you charge for consumables or is there a currency effect in play here or is it just that the average machine is being used more?

Doug Fletcher

A couple of things are driving it. Obviously the installed complete is going up quite well mainly in North America but in our overseas geographies in Europe and Latin America installed base is probably going up a little bit faster. Obviously the currency strengthening in the Euro and Latin American currencies has helped our growth. We do not break that out separately. I gave you the total numbers for our revenue but it has helped our spare parts group obviously. I think the last piece is we are starting to see the benefit mainly in North America from the fact we are capturing a higher percentage of the spare parts sales from the 87K than we do with the 60K product as we’ve discussed in the past.

Alan Robinson

Okay. And with you having had some experience with the Flowpart system domestically for a couple of years now – how are trends there? Are you starting to see saturation in the pickup rates of sales using the online fulfillment mechanism? Are we starting to flatten out there? Could you give us some color there a little bit?

Doug Fletcher

I would say in North America we have reached a point where we’re not seeing huge incremental changes in terms of usage behavior. It is trended but it is not the big jumps. We’re still moving up in Europe. It is still the adoption rates are still lower than the U.S. but they are increasing faster as people are getting used to it and we’re looking at expanding the number of languages that we have on www.floweuropeparts.com which will also help that adoption.

Alan Robinson

Okay. Looking at the detail in the 10Q it looks like gross margins for the North American waterjets were probably about the highest we’ve seen in nearly two years. Could you give us some color regarding the drivers there specifically for North America and then could you talk a little bit about the apparent weakness in international gross margins in contrast during the quarter?

Doug Fletcher

Sure. I think Alan part of the problem with the margins is, as you note since it looks like you’ve already read through it, is the note that we made that we went through a process of a new transfer price program this past year and we have in line with that economic study have increased our transfer prices to our overseas subsidiaries. That has a net impact of reducing their margins and increasing the margins here in North America. So I really think…I know it is difficult to say…but I would probably say that the best way to look at it is in a total/total basis because one of the problems with segment account is you have to do it as is the regulatory reporting in the region. I would say that we’re not seeing in any one geography significant impacts on margins that would be indicated by what you’re looking at there.

Alan Robinson

Okay. And just to wrap up, what do you have on the schedule in terms of trade shows this year? To that point, how are you looking at your sort of quarterly G&A on sales and marketing run rates now? Should we use the rates we saw during the quarter as more of the representative type of rates – specifically for G&A?

Doug Fletcher

Well I think that what I would say to that is we will have a variation by quarter in our G&A rates. I think that the timing of, as you said, the trade shows – we do have IMTS coming up this September – the big trade show in Chicago that is every two years. We have timing you know in terms of our professional fees depending on the time of order, etc. I think it is better to come back to what we’ve said and what I’ve mentioned in my remarks is that we expect to keep our total SG&A to below where we were last year. $87 million last year. We expect to hold below that this year.

In going forward again it comes back to we believe we are going to leverage this business. We believe we can be at or above 10% revenue growth and 20% operating margin of compounded growth – excuse me but growing our income by 20% - and we can do that through a number of ways. Obviously sales volume and improving our margins.

I’m not going to predict quarter-by-quarter Alan G&A. Again there is some volatility there.

Alan Robinson

Okay and just to close off…a couple of quarters ago you said you were looking at an 18-20% effective tax range for the year. Given the high tax rate in the quarter and the Germany issues, what is your view of the tax for the year now?

Doug Fletcher

Well the quarter represents a bit of a catch up because what you have to do is once you determine that your effective tax rate is higher than you were predicting that you have to true it up. We’re still looking at for the year, if you back out the valuation release, you know going forward number for the year probably is slightly above what I said before – slightly above 20% for the rest of the period.

Alan Robinson

Okay. Thank you.

Operator

Thank you. The next question comes from the line of Richard Hoss with Roth Capital Partners. Please go ahead.

Richard Hoss

Good morning guys. Just two real quick ones. One, I guess to follow back up on the Asia orders, I realize the comps are really kind of N/A at this point but I guess I’m just looking for a run rate going forward. Fairly strong orders this quarter. Can I think of it as a baseline or can I think of it to vary around this level?

Doug Fletcher

That’s a tough one to look into the crystal ball and predict. I think the way to think about it is we are pleased with this quarter. Could there be variation up or down from this quarter? Yes. As I said earlier I would not have expectations that there would be continuing step functions, leapfrogs forward from this level.

Richard Hoss

Okay. And then just quickly on the government contract that is talked about in your queue. $4 million contracted. Any additional information on that?

Doug Fletcher

No particularly for competitive reasons. We’ll just say that there is a government out there somewhere in the world that took a liking to our product and gave us some nice orders.

Richard Hoss

Okay but it doesn’t assume the U.S. government – it could be any government then?

Doug Fletcher

Somewhere in the world. We don’t want to leave too many footprints in the sand with this call because our competitors will follow it.

Richard Hoss

Alright. Thanks guys.

Operator

Thank you. The next question comes from the line of Greg Eisen with ICM Asset Management. Please go ahead.

Greg Eisen

Thanks. Good morning. Could you amplify a little bit about what the future is of your Canadian business now that you’ve made the decision in the application segment to not sell any non-waterjet systems in the future. Where does that leave the Canadian applications segment and as a corollary could you talk about what OMAX has for business up in Canada and is that a meaningful addition to flesh our your Canadian side?

Doug Fletcher

We don’t comment a whole lot on OMAX’s business because they are a privately held company that is independent from us right now. It is fairly common information that they don’t have a factory up there like we do.

In terms of our applications business the piece that is of most interest is what we have by elimination of the rest of it gotten the focus down to and that is waterjet applications for these robotic cells largely. It is primarily six-axis robots on pedestals inside some sort of a structure with some sort of a part change out mechanism that introduces the part in front of the robot. The robot uses the waterjet to cut the part and then the change out brings the part back out of the cell. So that’s pretty much the business there and we have a solid engineering team there that customizes a modular product line and utilizes really our strengths which is waterjets into some of the more advanced applications.

Greg Eisen

Okay what you just described it sounds like the Canadian business isn’t as diversified by end markets as your United States business. Is that correct? In terms of the end markets?

Doug Fletcher

Well I guess I would just say that in that more advanced, more semi-custom to custom application of a waterjet there are many end markets and many different types of applications some of which may not even have a cutting head on the end of it. It may be using our high pressure stream of water for cleaning parts. So that business has the opportunity to sell into a wide variety of end applications.

Greg Eisen

Okay. I’ll leave it there. Thanks.

Operator

Thank you. The next question comes from the line of [JD Pagent].

J.D. Pagent

Yeah hi guys. A couple of questions. One just following up on the applications business. You had another strong quarter. What does the revenue rate there look like once you are fully done selling in the part you have discontinued?

Doug Fletcher

We probably year to date probably had roughly $4-5 million Canadian in the business that we’ll be discontinuing so I think that will probably give you an indication of the business that will be remaining and that is the business that we believe we can grow.

John Leness

It is important to note that that piece that is going away there is a reason we’re going away from it because it didn’t turn much to the EBITD line.

J.D. Pagent

Right. I think you had a comment about some other costs related to that endeavor that you incurred this quarter?

Doug Fletcher

Yeah we took some write downs on accounts receivable during the quarter of about $400,000.

J.D. Pagent

And that shows up in COGS?

Doug Fletcher

No. That would show up in SG&A.

J.D. Pagent

And I was trying to remember also if there was something similar in the October quarter?

Doug Fletcher

Yes there was.

J.D. Pagent

Was that the same kind of thing? AR write downs?

Doug Fletcher

Correct. About 320. The business that we’re getting out of, which is material handling, so it doesn’t relate to waterjet…a lot of the material handling business was tied into the first tier and second tier supplier to the domestic automobile industry. So a number of those companies have gone through their difficult times. A couple of bankruptcies. So it’s combined. It is a business that has not been profitable for us but it is also tied to an industry that has been running into some difficulties. That is one of the drivers for us to get out of that business. In fact it is also non-core.

J.D. Pagent

Okay. And the other question had to do with the long term targets for 10 and 20. Do you look at that as we move into fiscal 2009 especially on the bottom line part of that being especially easy because hopefully you won’t have the abundance of these abnormal charges like you had this year like in the July quarter from the CEO change and some of the discontinued operations charges that we just described?

Charlie Brown

I am looking and have been for decades for the business that has a target that is easy to hit. So no I don’t think anything in that 10 and 20 is easy. Do we feel we can do it? Yes. That’s why we continue to stand behind it.

J.D. Pagent

But the 20% you are kind of looking at that off the GAP number or if we adjust for the one-time charges add those back and then you grow 20% on top of that?

Doug Fletcher

I think a couple of things. Clearly as Charlie said we’d like to do better than the 20% but one of the things that we’ve mentioned on prior calls and with the start of the first quarter earnings call is there are still investments and expenses we need to incur with regards to our information systems. Some of that has started to impact us this year but will impact us even more going forward. That’s going to take us a couple of years to complete so I think, again I come back to what Charlie said, we’re confident in the 10. We’re confident in the 20. We would like to do better.

Charlie Brown

We need to reinvest in this business as we continue to move it forward. So that’s really the lever I would say. How much can we reinvest and how quickly.

J.D. Pagent

I was just looking at $3-$4 million of charges this year. If that goes away that alone is your 20%. But then again some of that you need to invest and so forth. That’s the point you are making.

Okay. The final question from me is just relative to the acquisition. I can’t remember actually what the target level was but some level of accretion. Should we be thinking about that as accretion on top of where the consensus estimate is now for fiscal 2009, or accretion on top of that kind of 10 and 20?

Doug Fletcher

Well I want to be careful because first thing we don’t agree or disagree with the consensus estimate because we don’t give that level of guidance in terms of EPS. What we have said publicly is that in the first year this would be accreted to earnings of 10%.

J.D. Pagent

Okay so whatever your internal plan is, 10% on top of that?

Doug Fletcher

Yes. And what we’ve said is, to clarify, that this is not how we’re going to get to 10 and 20%. When we are successful in closing that transaction, the OMAX business adds to the base and then we will grow the larger base then 10-20 growing forward.

J.D. Pagent

Right. But for that 10% accretion it is kind of more on top of your internal model versus what the street has right now, for instance?

Doug Fletcher

Right.

J.D. Pagent

Okay. Thank you guys.

Operator

Thank you. We have time for one more question. The last question comes from the line of Chad Webson of Paradigm Capital. Please go ahead.

Chad Webson

I was just wondering if you guys could possibly characterize the nature of the receivable that was on the extended payment terms of the government contract. If you could give a little clarity as to is it a state or local funded type of project or any further detail would help.

Doug Fletcher

I think the only detail that really matters is that the term on it is about up and we’ve already started to receive the cash.

Chad Webson

Okay.

Operator

Thank you. I will now turn it back over to management.

Doug Fletcher

Just a final note to reiterate that we’re excited about the quarter we were able to report and we appreciate your interest and your questions. Thank you very much.

Operator

Thank you. Ladies and gentlemen this does conclude the FLOW International third quarter conference call. Thank you for your participation and using ACT Conferencing. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!