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Flow International has a
leadership position in markets with low penetration and high growth rates, which bodes
well for the future of their waterjet products
Industrial Goods
Machine Tools & Accessories
(FLOW-NASDAQ)
Flow International
23500-64th Avenue South
Kent, WA 98032
Phone: 253-850-3500
Stephen R. Light
President, CEO, Director
Interview conducted by:
Walter Banks
CEOCFOinterviews.com
Published - November 24, 2006
BIO:
Stephen R. Light
President and CEO Flow International
Stephen R. Light (age 59) became President and Chief Executive Officer of Flow
International and was appointed to its board in January 2003. Prior to joining Flow,
from 2000-2002, Mr. Light was President and Chief Executive Officer of Omniquip Textron
Group Inc., a manufacturer of aerial work platforms, telescopic material handling
equipment and hydraulic systems. Prior to that he held numerous executive positions
with Bucyrus International, Harnischfeger Industries, Emerson Electric Company, North
America Philips and from 1968-1985 at General Electric Company. Mr. Light earned a
B.S. in mechanical engineering in 1968 from Colorado State University and did post
graduate work at Union College and the University of Louisville. Mr. Light presently
serves on the board of the Association of Manufacturing Technology and has served on the
boards of Cardinal Stritch University, Children’s Hospital of Wisconsin, Junior
Achievement of Wisconsin and Western Garnet, Inc. He received Director Certification from
the National Association of Corporate Directors in 2005. Mr. Light was named an
Ernst and Young “Entrepreneur of the Year” in 2005” and was invited to
close the NASDAQ Stock Exchange on April 11, 2006.
Company Profile:
Flow International Corporation is the world leader in the development and manufacture of
ultrahigh-pressure (UHP) waterjet technology, and a leading provider of robotics and
assembly equipment. Flow provides technologically advanced, environmentally-sound
solutions to the manufacturing and surface preparation cleaning markets.
Flow's roots date back to the early 1970s, when former research scientists from Boeing
founded Flow Research. Their mission was to develop new businesses based on advanced
technologies. The first technology commercialized by that company was the use of an
ultrahigh-pressure waterjet as an industrial cutting tool. Flow later invented, patented,
and perfected the world's first abrasive waterjet system to cut hard materials up to 12
inches thick.
Since 1974, Flow has delivered more than 8,500 waterjet and abrasive waterjet systems to
customers in more than 45 countries. With nearly 60% worldwide market share, Flow is the
world leader in the development and manufacture of UHP waterjet technology and the
dominant provider of such equipment. With corporate headquarters based in Kent, Washington,
Flow now employs more than 700 employees in offices in Indiana, Michigan, Canada, Brazil, Germany,
UK, Sweden, Spain, Italy, France, Taiwan, Japan, and China. Today, the company's core
markets have grown to include aerospace, automotive, job and machine shops, paper, food,
art and architecture, surface preparation, food processing and other specialty
applications. Flow's global preeminence can be attributed to its focus on key areas
including technology leadership, providing total systems solutions, new product
development through extensive research and development, expanding applications within core
markets and an unrelenting focus on customer success through system reliability and
worldwide technical support from the largest service team focused on waterjet and
ultrahigh-pressure technology in the world.
CEOCFO: Mr. Light, will you tell us how long you have been
with Flow and where was the company when you started and how has it changed?
Mr. Light: “I joined Flow in January of 2003 for the
express purpose of performing a turnaround. Flow had very serious liquidity issues. We
were in the middle of the 2001/2003 or near the tail end of that recession depending on
who you asked, which caused Flow’s revenue to drop about 25% per year during that
term, from just over $200 million to slightly over $140 million, which when adjusted for
recent divestitures, actually had us down to $100 million. I was recruited from the
TEXTRON Corporation in the fall of 2002. Since my arrival, we’ve paid off the full
$107 million dollars of debt we were carrying. We now have about $40 million on deposit in
our various banks. Growth has returned to the company and we finished the most recent
fiscal year, 2006, with $203 million of revenue. We were profitable in the year for the
first time in four years, adjusting for financial re-statements; we were profitable for
the first time in the company’s history. We have re-baselined the company to focus on
its core which we define as ultra high-pressure water pumps and water-management systems.
While we go to market through the machine tool industry, the industrial cleaning industry,
and the aerospace industry; fundamentally, Flow is a pump company.”
CEOCFO: Would you say
the reason for the turnaround was a tightening of the bootstraps or was it more developing
sales?
Mr. Light: “This was a turnaround where we worked our
way out the old fashioned way; we slashed cost by closing factories, outsourced high
cost work, found new low-cost suppliers, improved factory productivity, and increased
inventory turnover. We did all of those things while at the same time we took an
aggressive view to understanding why our waterjet cutting market did not suffer as much as
other machine tool companies in the most recent recession. The long answer is that we did
over 150 specific things to affect the turnover. The most significant was that we very
clearly communicated to the employees what the risks to the company were and what
obstacles we were facing. We told them we were going to march toward positive cash flow
until such time that we were out of debt and then we were going to worry about everything
else, and we did that. The results of their efforts are what we are seeing now.”
CEOCFO: Will you tell us
more about Flow products and the competitive advantages you offer?
Mr. Light: “Most people in North America and Europe have
already benefited from a Flow waterjet. For example, we like to start our investor
presentations by asking if anyone in the audience has ever eaten a Fig Newton, a
Chicken Mc Nugget, or a baby carrot, or has ever applied a Pampers diaper, flown in a
Boeing or Airbus airliner, or if anyone drives an American made automobile, because
those folks are already enjoying the benefits of a Flow waterjet. Waterjets are used to
cut hard and soft materials across all kinds of industries. The reason is that they offer
very low tooling costs, they are very flexible, have a low initial purchase price and low
operating costs. Productivity savings typically justify our equipment in only six months.
We do not have a difficult time convincing a potential customer to buy a Flow waterjet
once we get access to that customer. That was one of our major issues previously; that
people did not know what waterjets were, what they could do, and how prevalent they were
in certain areas of the market.”
CEOCFO: Are your
revenues based on product sale or razor/razor blade model?
Mr. Light: “27% of revenue is derived from post-original
equipment sale support. Anything that touches the ultrahigh-pressure water our pumps
produce, which begins at 40,000 pounds per square inch, is during normal machine
operations. This creates a “razor/razor blade” business model. That means that
27% of revenue comes from what we call aftermarket and consumables. Of the remainder of
the 73% of revenue, which is comprised of new systems sales, 32% of that comes from repeat
sales to existing customers, and another 34% comes from word-of-mouth. When you run that
math and sum it up it says that something less than 30% of revenue each year is derived
from new customers we identify. As a result of that long term relationship with our
existing customers, we’ve developed the value system for the company. Flow embraces
three very simple values. The first one is that we take care of “yesterday’s
customers”, because given the numbers I just shared with you; the existing customer
is the source of our future growth. Keep that customer satisfied and the world looks good;
dissatisfy your customer base and the world is not nearly as cooperative. The second value
is to manage the company in a fiscally and ethically responsible manner. Never again, will
this company allow itself to get into the kind of financial stress it was in; today we
look at a wide array of performance metrics as opposed to just one metric, which was a
contributor to our previous issues. The third Flow value is to maximize the contribution
of our human resources. That’s our way of first striving to be a good place to work,
second employing the best talent, and third to grow and groom that talent for our future
challenges. We also include in this value, simultaneously taking care of the other people
that are involved with the company, including suppliers, customers and shareholders.”
CEOCFO: What is your
greatest challenge going forward?
Mr. Light: “Our greatest challenge today is our nearly
insatiable appetite for talent to address all the opportunities we find in front of us. We
are busy now trying to add 90 people to achieve our current year’s progress toward
our long-term revenue target of a half a billion dollars in 2010. To achieve that target,
we’ll need to add over 700 people and that presumes very healthy productivity growth.
Of course, some may come with expected acquisitions. We have experienced remarkable
productivity growth. In 2003, we generated $165 thousand of revenue per employee while in
our fiscal 2006, completed this April, we produced $303 thousand of revenue per employee.
I consider that significant productivity growth. Our biggest challenge is finding the
right people to fuel this business to enable it to grow as rapidly as the market requires.
Those are people in engineering, sales, service, marketing, finance and accounting.”
CEOCFO: Are you looking
at growth within the current areas or are you looking to expand the markets?
Mr. Light: “Our first growth path comes from increasing
penetration into existing served markets as well as developing new waterjet cutting and
cleaning applications using our ultrahigh-pressure pump technology. Our research data
tells us that waterjet technology has penetrated approximately 5% of the available
customers in the markets in which we already sell machines repetitively. For example, in
the US we’ve identified over 65,000 potential customers for our equipment. Secondly,
we derive about 45% of our revenue offshore, but we do very little business in India,
while we are growing our China business very rapidly. Finally, we derive a very modest
amount of revenue from South America, Latin America, Africa, and the Persian Gulf. We
think these are unsecured markets. Our third form of growth is penetrating new markets
with new applications of our waterjets. We frequently receive telephone calls and other
forms of enquiry from organizations who believe a waterjet might present a new solution to
a process problem they have. A good example of this is SanDisk Corp. (NASDAQ: SNDK), the
people who make the flash memory chips you have in your cell phone and digital camera.
SanDisk came to us about two years ago and we developed an application-specific waterjet
processing machine, which they now use to cut flash memory chips. In the last two years,
they have cut almost two hundred million chips on our machines and in just two years,
they’ve become the largest owner of waterjets in the world, by machine count. Cutting
flash memory chips is an application that did not exist two-and-a-half years ago.
We’re excited about our work in the semiconductor industry with SanDisk and five
other customers. We are equally excited about our work with The Boeing Company (NYSE: BA)
and Airbus on their new composite airplanes. Waterjet cutting is the most reliable way to
cut composites yet invented; the reason is that waterjets do not delaminate the many
composite layers required to make a composite part. Delamination of a composite part is
the same as a crack in a metal part. Flow’s equipment will cut the wing skins and all
the flight surfaces for the new Boeing 787. We are in a similar position with Airbus on
their new A350 airplane. We see many new applications, some of which we are very
excited about. One of the exciting elements of working at Flow is the wide range of
customer challenges we face and master on a regular basis.”
CEOCFO: As you look to
build your business, what is your financial picture?
Mr. Light: “We are very fortunate to have an extremely
strong balance sheet with a considerable amount of cash. Having overcome the desperate
position we faced and fully paying off our debt, our lenders view us as people of high
integrity, fiscally conservative, and pretty trust worthy. We have a lot of borrowing
capacity through our current lenders, which is untapped at this point. Our major use of
cash on a go-forward basis will be as Capex where we are investing in a new information
system. During the past period, we’ve been unable to invest to keep up with that
technology. Consequently, we have an information technology backbone that does not
support the multinational nature of our business. We also intend to be acquisitive in our
core, ultra high-pressure water pumps and water-management systems. We do not see
ourselves requiring additional stock offerings. We did in 2005 in order to repay residual
subordinated debt once the turnaround was mostly done. We see our relationship with
investors as very positive and one in which we work to assure as much transparency as we
can possibly deliver in our filings and communications and as much consistency in those
same manners. We also strive to be accessible and responsive while recognizing we’re
running this business in the public market.”
CEOCFO: In closing, what
would you like to say to potential investors?
Mr. Light: “I’ve had the good fortune to frequently
speak with people considering an investment in Flow and what I encourage them to do is
look not only backwards at our history and resurrection, but to look forward at what this
management has in focus and the excellent products we’re bringing to this rapidly
growing market. We know how this company makes money, and we are intensely focused on it.
This company possesses a highly desirable technology in an underserved market. Increasing
penetration though organic growth is a reliable and proven means of generating very strong
growth and profitability, with positive cash flows for many years. The development of new
applications for our system, the very rapid growth in composites manufacturing where
waterjets excel, and the application of low weight composite materials to a widening range
of products, all bode well for the future of waterjetting. Since we are focused on
superior execution in our served markets, we are confident we are growing a profitable
company with high levels of customer and stakeholder satisfaction; I think we make an
attractive investment for those who have a long horizon. There are few industrial
companies that I am aware of that have both the current growth rate and the sustained
growth potential that we have coupled with proven profitability.”
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