UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34443

 

FLOW INTERNATIONAL CORPORATION

 

WASHINGTON		91-1104842
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

23500 — 64th Avenue South
Kent, Washington 98032
(253) 850-3500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a Smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

The registrant had 46,880,180 shares of Common Stock, $0.01 par value per share, outstanding as of February 19, 2010.

 

 

FLOW INTERNATIONAL CORPORATION

INDEX

		Page
Part I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets — January 31, 2010 and April 30, 2009			3
Condensed Consolidated Statements of Operations — Three and Nine Months Ended January 31, 2010 and 2009			4
Condensed Consolidated Statements of Cash Flows — Nine Months Ended January 31, 2010 and 2009			5
Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Loss — Nine Months Ended January 31, 2010 and 2009			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
Part II — OTHER INFORMATION			30
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. Submission of Matters to a Vote of Security Holders			31
Item 5. Other Information			31
Item 6. Exhibits			31
EX-31.1
EX-31.2
EX-32.1
EX-99.1

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands, except share amounts)

		January 31,				April 30,
		2010				2009
ASSETS:
Current Assets:
Cash and Cash Equivalents		$	6,622			$	10,117
Restricted Cash			654				220
Receivables, net			36,859				32,103
Inventories			22,031				21,480
Deferred Income Taxes, net			2,394				8,686
Deferred Acquisition Costs			—				17,093
Other Current Assets			7,956				5,544
Total Current Assets			76,516				95,243
Property and Equipment, net			21,674				22,983
Intangible Assets, net			4,608				4,456
Deferred Income Taxes, net			25,588				17,480
Other Assets			4,801				4,798
		$	133,187			$	144,960
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities:
Notes Payable		$	2,150			$	15,226
Current Portion of Long-Term Obligations			54				1,367
Accounts Payable			15,233				10,215
Accrued Payroll and Related Liabilities			5,235				5,406
Taxes Payable and Other Accrued Taxes			1,207				2,276
Deferred Income Taxes			667				651
Deferred Revenue			5,698				4,649
Customer Deposits			5,031				3,322
Reserve for Patent Litigation (Note 6)			—				15,000
Other Accrued Liabilities			8,048				9,208
Total Current Liabilities			43,323				67,320
Long-Term Obligations, net			21				1,937
Deferred Income Taxes			5,714				5,498
Subordinated Notes (Note 6)			7,775				6,000
Other Long-Term Liabilities			1,569				1,494
			58,402				82,249
Commitments and Contingencies (Note 8)
Shareholders’ Equity:
Series A 8% Convertible Preferred Stock—$.01 par value, 1,000,000 shares authorized, none issued			—				—
Common Stock—$.01 par value, 84,000,000 shares authorized, 46,880,180 and 37,704,684 shares issued and outstanding at January 31, 2010 and April 30, 2009, respectively			465				372
Capital in Excess of Par			159,237				140,634
Accumulated Deficit			(79,999	)			(71,403	)
Accumulated Other Comprehensive Loss:
Defined Benefit Plan Obligation, net of income tax of $42 and $37			(85	)			(80	)
Cumulative Translation Adjustment, net of income tax of $723 and $508			(4,833	)			(6,812	)
Total Shareholders’ Equity			74,785				62,711
		$	133,187			$	144,960

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2010				2009				2010				2009
Sales		$	45,356			$	48,711			$	125,145			$	166,353
Cost of Sales			27,133				29,565				76,314				95,436
Gross Margin			18,223				19,146				48,831				70,917
Operating Expenses:
Sales and Marketing			10,065				9,996				26,956				31,996
Research and Engineering			2,235				2,281				5,782				6,809
General and Administrative			6,198				6,418				19,391				22,586
Provision for Patent Litigation (Note 6)			—				29,000				—				29,000
Goodwill Impairment			—				2,764				—				2,764
Restructuring and Other Operating Charges, net			—				514				4,222				2,394
Total Operating Expenses			18,498				50,973				56,351				95,549
Operating Loss			(275	)			(31,827	)			(7,520	)			(24,632	)
Interest Income			39				94				132				396
Interest Expense			(468	)			(442	)			(1,906	)			(733	)
Other Income (Expense), net			(1,218	)			392				(866	)			(56	)
Loss Before Benefit for Income Taxes			(1,922	)			(31,783	)			(10,160	)			(25,025	)
Benefit for Income Taxes			1,124				11,106				2,653				6,277
Loss from Continuing Operations			(798	)			(20,677	)			(7,507	)			(18,748	)
Income (Loss) from Discontinued Operations, net of income tax of $0, $(46), $0, and $0			51				(686	)			(1,089	)			(597	)
Net Loss		$	(747	)		$	(21,363	)		$	(8,596	)		$	(19,345	)
Basic and Diluted Loss Per Share:
Loss from Continuing Operations		$	(0.02	)		$	(0.55	)		$	(0.18	)		$	(0.50	)
Discontinued Operations			0.00				(0.02	)			(0.02	)			(0.01	)
Net Loss		$	(0.02	)		$	(0.57	)		$	(0.20	)		$	(0.51	)
Weighted Average Shares Used in Computing Basic and Diluted Loss Per Share:
Basic and Diluted			46,879				37,639				42,490				37,609

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)

		Nine Months Ended
		January 31,
		2010				2009
Cash Flows from Operating Activities:
Net Loss		$	(8,596	)		$	(19,345	)
Adjustments to Reconcile Net Loss to Cash Provided by Operating Activities:
Depreciation and Amortization			4,078				3,210
Deferred Income Taxes			(1,735	)			(7,375	)
Provision for Slow Moving and Obsolete Inventory			432				199
Bad Debt Expense			517				1,048
Warranty Expense			2,106				2,423
Stock Compensation Expense			1,452				1,473
Unrealized Foreign Exchange Currency (Gains) Losses			(189	)			1,524
Write-off of Deferred Debt Issuance Costs			253				—
Provision for Patent Litigation			—				29,000
OMAX Termination Charge			3,219				—
Goodwill Impairment			—				2,764
Indemnification Charge			1,168				—
Interest Accretion on Subordinated Notes			556				—
Realized Loss on Liquidation of Dormant Foreign Entities			1,277				—
Other			(447	)			419
Changes in Operating Assets and Liabilities:
Receivables			(4,303	)			(2,287	)
Inventories			(100	)			1,849
Other Operating Assets			(1,416	)			(4,798	)
Accounts Payable			6,735				(5,854	)
Accrued Payroll and Related Liabilities			(513	)			(2,319	)
Deferred Revenue			1,003				(760	)
Customer Deposits			1,556				(678	)
Release of Funds from Escrow			17,000				—
Payment for Patent Litigation Settlement			(15,000	)			—
Payment for OMAX Termination			(2,000	)			—
Other Operating Liabilities			(4,828	)			(3,454	)
Cash Provided by (Used in) Operating Activities			2,225				(2,961	)
Cash Flows From Investing Activities:
Expenditures for Property and Equipment			(8,297	)			(6,251	)
Expenditures for Intangible Assets			(628	)			(611	)
Proceeds from Sale of Property and Equipment			4,775				118
Payments for Pending Acquisition			—				(4,182	)
Payments for Dardi Investment			—				(3,282	)
Restricted Cash			(422	)			(304	)
Cash (Used in) Investing Activities			(4,572	)			(14,512	)
Cash Flows from Financing Activities:
Borrowings under Senior Credit Agreement			12,325				—
Repayments under Senior Credit Agreement			(23,175	)			—
Borrowings Under Notes Payable			—				1,285
Borrowings Under Other Financing Arrangements			2				1,269
Repayments Under Other Financing Arrangements			(1,380	)			(317	)
Repayments of Long—Term Obligations			(4,322	)			(795	)
Proceeds from Issuance of Common Stock, net of Issuance Costs			17,199				—
Debt Issuance Costs			(607	)			—
Cash Provided by Financing Activities			42				1,442
Effect of Changes in Exchange Rates			(1,190	)			39
Decrease in Cash And Cash Equivalents			(3,495	)			(15,992	)
Cash and Cash Equivalents at Beginning of Period			10,117				29,099
Cash and Cash Equivalents at End of Period		$	6,622			$	13,107
Supplemental Disclosures of Cash Flow Information:
Cash Paid during the Year for:
Interest			920				490
Taxes			755				2,417
Supplemental Disclosures of Noncash Investing and Financing Activities:
Accounts Payable incurred to acquire Property and Equipment, and Intangible Assets			383				787
Accrued Liabilities Incurred for Pending Acquisition			—				551

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
(unaudited, in thousands)

																		Accumulated
		Common Stock								Capital								Other				Total
						Par				In Excess				Accumulated				Comprehensive				Shareholders’
		Shares				Value				of Par				Deficit				Loss				Equity
Balances, May 1, 2008			37,590			$	371			$	139,007			$	(47,584	)		$	(5,730	)		$	86,064
Components of Comprehensive Loss:
Net Loss															(19,345	)							(19,345	)
Cumulative Translation Adjustment, Net of Income Tax of $395																			(1,416	)			(1,416	)
Total Comprehensive Loss																							(20,761	)
Stock Compensation			63				0				1,463												1,463
Balances, January 31, 2009			37,653			$	371			$	140,470			$	(66,929	)		$	(7,146	)		$	66,766
Balances, May 1, 2009			37,705			$	372			$	140,634			$	(71,403	)		$	(6,892	)		$	62,711
Components of Comprehensive Loss:
Net Loss															(8,596	)							(8,596	)
Adjustment to Minimum Pension Liability, Net of Income Tax of $5																			(5	)			(5	)
Realization of Foreign Currency Translation Losses from the Liquidation of Dormant Foreign Entities																			1,277				1,277
Cumulative Translation Adjustment, Net of Income Tax of $215																			702				702
Total Comprehensive Loss																							(6,622	)
Sale of Common stock at $2.10 per share, net of Stock Issuance Costs of $1.7 million			8,999				90				17,109												17,199
Stock Compensation			176				3				1,494												1,497
Balances, January 31, 2010			46,880			$	465			$	159,237			$	(79,999	)		$	(4,918	)		$	74,785

See Accompanying Notes to
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tabular dollar amounts in thousands, except per share amounts)
(Unaudited)

Note 1—Basis of Presentation

     In the opinion of the management of Flow International Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and accruals necessary to fairly present the financial position, results of operations and cash flows of the Company. The financial information as of April 30, 2009 is derived from the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended April 30, 2009 included in Item 8 in the fiscal year 2009 Annual Report on Form 10-K (“10-K”). These interim condensed consolidated financial statements do not include all information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States, and should be read in conjunction with the Company’s fiscal year 2009 Form 10-K. The preparation of these interim condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Operating results for the three and nine months ended January 31, 2010 may not be indicative of future results.

Note 2—Recently Issued Accounting Pronouncements

     In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 105, formerly SFAS No. 168, “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162”. This Statement established the FASB Accounting Standards Codification (“ASC”), along with rules and interpretive releases of the U.S. Securities and Exchange Commission under authority of federal securities laws, as the source of authoritative GAAP in the United States. The Statement is effective for interim and annual reporting periods ending after September 15, 2009, which is October 31, 2009 for the Company. The Company conformed to the FASB Accounting Standards Codification when referring to GAAP in the Quarterly Report on Form 10-Q for the interim period ended October 31, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.

     In September 2006, the FASB issued ASC 820, formerly SFAS No. 157, “Defining Fair Value Measurement”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 became effective for the Company as of May 1, 2008 for all financial assets and liabilities and on May 1, 2009 for all nonfinancial assets and liabilities. There were no nonfinancial assets or liabilities requiring initial measurement or subsequent remeasurement during the nine months ended January 31, 2010. The required disclosures are included in Note 16 — Fair Value Measures.

     In December 2007, the FASB issued ASC 805, formerly SFAS No. 141 (revised 2007), “Business Combinations” and ASC 810, formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51”. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805 requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. Under ASC 805, the Company expensed $3.8 million of previously deferred direct transaction costs which had been capitalized as part of the contemplated acquisition cost of OMAX Corporation (“OMAX”) in the fourth quarter of its fiscal year 2009 as it was deemed probable that the contemplated merger with OMAX would not close prior to the adoption of ASC 805 on May 1, 2009. The adoption of ASC 805 may also have an impact in the future in the event that the Company enters into a business combination. ASC 810 establishes reporting requirements that clearly identify and distinguish between the interests of the parent and the interest of the non controlling owners. The provisions of ASC 810 are to be applied prospectively with the exception of the presentation and disclosure, which are to be applied for all prior periods presented in the financial statements. The adoption of ASC 810 had no impact on the Company’s consolidated financial statements.

     In April 2009, the FASB issued ASC 825-10, formerly FSP 107-1 and APB 28-1, “Disclosures about Fair Values of Financial Instruments”, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825-10 was effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending

after March 15, 2009. The Company adopted ASC 825-10 on May 1, 2009. Refer to Note 16 — Fair Value Measures for disclosure requirements required by ASC 825-10.

     In May 2009, the FASB issued ASC 855, formerly SFAS No. 165, “Subsequent Events”. The standard did not require significant changes regarding recognition or disclosure of subsequent events, but does require disclosure of the date through which subsequent events have been evaluated for disclosure and recognition. The standard was effective for financial statements issued after June 15, 2009 which was May 1, 2009 for the Company. The Company has evaluated subsequent events in accordance with the Statement through the filing of this Quarterly Report on Form 10-Q.

     In September 2009, the FASB ratified the consensuses reached by the EITF regarding ASU 2009-13, formerly EITF Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables” (“ASU 2009-13”), and ASU 2009-14, formerly EITF Issue No. 09-3, “Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”). ASU 2009-13 applies to multiple-deliverable revenue arrangements that are currently within the scope of ASC 605-25, “Revenue Arrangements with Multiple Deliverables.” ASU 2009-13 also:

	•		provides principles and application guidance on whether a revenue arrangement contains multiple deliverables, how the arrangement should be separated, and how the arrangement consideration should be allocated;
	•		requires an entity to allocate revenue in a multiple-deliverable arrangement using estimated selling prices of the deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price;
	•		eliminates the use of the residual method and, instead, requires an entity to allocate revenue using the relative selling price method; and
	•		expands disclosure requirements with respect to multiple-deliverable revenue arrangements.

ASU 2009-14 applies to multiple-deliverable revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of software revenue guidance. ASU 2009-14 removes tangible products from the scope of the software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. The accounting guidance in ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal year 2011. Alternatively, an entity can elect to adopt the provisions of these issues on a retrospective basis. The Company is assessing the potential impact that the application of ASU 2009-13 and ASU 2009-14 may have on its consolidated financial statements and disclosures.

Note 3—Receivables, Net

     Receivables, net as of January 31, 2010 and April 30, 2009 consisted of the following:

		January 31,
		2010				April 30, 2009
Trade Accounts Receivable		$	27,258			$	25,304
Unbilled Revenues			10,789				9,033
			38,047				34,337
Less: Allowance for Doubtful Accounts			(1,188	)			(2,234	)
		$	36,859			$	32,103

     Unbilled revenues do not contain any amounts which are expected to be collected after one year.

     The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses on existing receivables. The Company determines the allowance based on historical write-off experience and current economic data. The allowance for doubtful accounts is reviewed quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged against the allowance when the Company determines that it is probable the receivable will not be recovered.

Note 4—Inventories

     Inventories are stated at the lower of cost (determined by using the first-in first-out or average cost method) or market. Costs included

in inventories consist of materials, labor, and manufacturing overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories to their estimated net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. Inventories as of January 31, 2010 and April 30, 2009 consisted of the following:

		January 31,
		2010				April 30, 2009
Raw Materials and Parts		$	11,917			$	11,806
Work in Process			2,323				1,762
Finished Goods			7,791				7,912
		$	22,031			$	21,480

Note 5—Disposal of Fixed Assets

     In September 2009, the Company sold its building in Hsinchu, Taiwan, receiving $4.7 million from the proceeds of the sale, and simultaneously entered into a lease agreement for an insignificant portion of the building for a one-year period, which has been treated as an operating lease. This sale concluded the Company’s overall efforts to consolidate its manufacturing activities. The Company recorded a gain of approximately $600,000 from the sale of the building, after paying closing costs and other adjustments. This gain was recorded in Restructuring and Other Operating Charges in the Company’s Condensed Consolidated Statement of Operations in the second quarter of fiscal 2010.

Note 6— Other Accrued Liabilities

     The Company’s other accrued liabilities consist of warranty obligations, restructuring liabilities, professional fee accruals, provisions for litigation, and other items.

Warranty Obligations

     The Company’s estimated obligations for warranty are accrued concurrently with the revenue recognized. The Company makes provisions for its warranty obligations based upon historical costs incurred for such obligations adjusted, as necessary, for current conditions and factors. Due to the significant uncertainties and judgments involved in estimating the Company’s warranty obligations, including changing product designs and specifications, the ultimate amount incurred for warranty costs could change in the near term from the current estimate. The Company believes that its warranty accrual as of January 31, 2010 is sufficient to cover expected future warranty costs.

     The following table shows the fiscal year 2010 year-to-date activity for the Company’s warranty obligations:

Accrued warranty balance as of May 1, 2009		$	2,423
Accruals for warranties for fiscal year 2010 sales			2,106
Warranty costs incurred in fiscal year 2010			(2,327	)
Change due to currency fluctuations			43
Accrued warranty balance as of January 31, 2010		$	2,245

Restructuring Charges and Other, net

     The Company recorded Restructuring Charges and Other, net of $4.2 million for the nine months ended January, 31 2010 on the Condensed Consolidated Statement of Operations which was comprised of the following:

	•		a net charge of $3.2 million to record the termination of the Company’s option to acquire OMAX Corporation, which is further discussed below;
	•		a charge of $1.4 million to record severance expenses related to reducing global staffing levels in response to the continued downturn in the near term demand for its products;
	•		a charge of $237,000 related to the completion of the Company’s plan to consolidate its manufacturing activities from Taiwan to the United States;

     The above charges, which were recorded in the first quarter of fiscal 2010, were offset by a credit of approximately $600,000 recorded in the second quarter of fiscal 2010 related to the gain recognized on the sale of the Company’s building in Hsinchu, Taiwan discussed in Note 5 — Disposal of Fixed Assets. There were no additional Restructuring and Other Operating charges recorded for the three months ended January 31, 2010.

     Restructuring Charges and Other in the comparative prior period of $514,000 and $2.4 million for the respective three and nine months ended January 31, 2009 were related to employee severance and termination benefits, lease termination costs, and inventory write-downs incurred for the closure of the Company’s manufacturing facility in Burlington, Ontario, Canada, as well as its office and operations in Korea, in order to establish a single facility for designing and building its advanced waterjet systems at its Jeffersonville, Indiana facility. The Company does not anticipate recording further charges related to the actions above.

     The following table summarizes the Company’s restructuring and other operating charges, net for the respective three and nine months ended January 31, 2010 and 2009:

		Three Months								Nine Months
		Ended January 31,								Ended January 31,
		2010				2009				2010				2009
Severance and termination benefits		$	—			$	494			$	1,604			$	2,258
Lease termination costs and long-lived assets impairment charge			—				20				—				136
Inventory write-down			—				—				—				108
Gain on sale of building			—				—				(601	)			—
		$	—			$	514			$	1,003			$	2,502

     The following table summarizes the Company’s fiscal year 2010 year-to-date restructuring liability:

		Standard				Advanced				All Other				Total
Balance, May 1, 2009		$	59			$	123			$	—			$	182
Restructuring charges			1,300				69				235				1,604
Cash payments			(1,082	)			(160	)			(199	)			(1,441	)
Balance, January 31, 2010		$	277			$	32			$	36			$	345

Provision for Patent Litigation

     In March 2009, the Company simultaneously entered into the following two agreements with OMAX Corporation:

     (1) A Settlement and Cross License Agreement (the “Agreement”) where both parties agreed to dismiss the litigation pending between them and release all claims made up to the date of the execution of the Agreement. The Company agreed to pay $29 million to OMAX in relation to this agreement which was funded as follows:

•		A non-refundable cash payment of $8 million to OMAX in March 2009 as part of the execution of the Agreement;
•		A cash payment of $6 million in March 2009 paid directly to an existing escrow account with OMAX, increasing the escrow amount from $9 million to a total of $15 million as part of the execution of the Agreement; and
•		In the event the merger would have been consummated by August 15, 2009, the entire amount would have been applied towards the $75 million purchase price. However, in the event the merger would not have been consummated by August 15, 2009, the $15 million held in escrow was to be released to OMAX on August 16, 2009 and the Company was to issue a promissory note in the principal amount of $6 million to OMAX for the remaining balance on the $29 million settlement amount.

     (2) An amendment to the existing Merger Agreement which provided for the following:

•		A non-refundable cash payment of $2 million to OMAX for the extension of the closing of the merger from March 31, 2009 to August 15, 2009 — with closing at the option of the Company; and
•		In the event the merger would have been consummated by August 15, 2009, the $2 million would be applied towards the $75 million purchase price. However, in the event the merger would not have been consummated by August 15, 2009 the $2 million was to be forfeited and the Company was to issue a promissory note in the principal amount of $4 million to OMAX.

     The Company recorded a $29 million provision related to the settlement of this patent litigation, pursuant to the terms of the Settlement and Cross Licensing Agreement, in fiscal year 2009.

     In May 2009, the Company terminated its 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. The Company recorded a $6 million charge pursuant to the provisions of the amended Merger Agreement in the first quarter of fiscal 2010, net of a $2.8 million discount as the two subordinated notes issued to OMAX during the second fiscal quarter were at a stated interest rate of 2%, which is below the Company’s incremental borrowing rate. This discount is being amortized as interest expense through the maturity of the subordinated notes in August 2013. The balance of the two subordinated notes issued to OMAX was $7.8 million as of January 31, 2010.

Note 7—Long-Term Obligations and Notes Payable

     The Company’s long-term obligations as of January 31, 2010 and April 30, 2009 consisted of the following:

		January 31,
		2010				April 30, 2009
Long-term loan		$	—			$	1,879
Other financing arrangements			75				1,425
			75				3,304
Less current maturities			(54	)			(1,367	)
Long-term obligations		$	21			$	1,937

     The long-term loan as of April 30, 2009 was a variable rate loan collateralized by the Company’s building in Taiwan. This loan had an annual interest rate of 3.67% and was scheduled to mature in 2011. In fiscal 2010, the Company paid off the entire balance outstanding under this loan with no prepayment penalty.

     The Company has previously leased certain office equipment under agreements that were classified as capital leases. In October 2009, the Company repaid the outstanding principal of $1.2 million on these capital leases as well as the total interest that would have accrued through the dates of maturity.

     Notes payable as of January 31, 2010 and April 30, 2009 consisted of the following:

		January 31,
		2010				April 30, 2009
Senior Credit Facility		$	2,150			$	13,000
Revolving credit facilities in Taiwan			—				2,226
		$	2,150			$	15,226

Senior Credit Facility

     On June 10, 2009, the Company amended its $40 million Credit Facility Agreement which modified the maturity date of the line to June 10, 2011 as well as certain covenants that the Company is required to maintain.

     In August 2009, in connection with its sale of common stock (refer to Note 9 — Shareholders’ Equity), the Company amended its financial covenants pursuant to its Credit Facility Agreement. The amendment eliminated the requirement to maintain a minimum Consolidated Adjusted EBITDA for the trailing four quarters of $8 million. Under the amended covenants, the Company must maintain the following ratios:

		Maximum Consolidated		Minimum Fixed Charge
		Leverage Ratio (i)		Coverage Ratio (ii)
Fiscal Year 2010
First Quarter		3.25x		2.0x
Second Quarter		3.35x		1.2x
Third Quarter		3.50x		1.2x
Fourth Quarter		3.35x		1.2x
Fiscal Year 2011
First Quarter		2.75x		2.0x
Thereafter		2.50x		2.0x

The revised covenants also require the Company to meet a liquidity test such that its consolidated indebtedness shall not exceed the total of 65% of the book value of the Company’s accounts receivable and 40% of the book value of the Company’s inventory.

     A violation of any of the covenants above would result in an event of default and accelerate the repayment of all unpaid principal and interest and the termination of any letters of credit. As of January 31, 2010, the balance outstanding under the facility amounted to $2.2 million which is reflected under Notes Payable in the Condensed Consolidated Financial Statements. The Company was in compliance with all its financial covenants as of January 31, 2010, as amended.

     Interest on the Line of Credit is based on the bank’s prime rate or LIBOR rate plus a percentage spread between 3.25% and 4.5% depending on whether the Company uses the bank’s prime rate or LIBOR rate and based on its current leverage ratio. The Company also pays a letter of credit fee equal to 3.5% of the amount available to be drawn under each outstanding stand-by letter of credit. The annual letter of credit fee is payable quarterly in arrears and varies depending on the Company’s leverage ratio.

     As of January 31, 2010, the Company had $34.5 million available under its Line of Credit, net of $3.4 million in outstanding standby letters of credit which is subject to the limitations under its existing covenants. As of January 31, 2010, based on the Company’s maximum allowable leverage ratio, the incremental amount it could have borrowed under our available Lines of Credit would have been approximately $10.0 million.

Revolving Credit Facility in Taiwan

     The Company maintains two separate unsecured revolving credit facilities in Taiwan with a commitment totaling $2.8 million at January 31, 2010, bearing interest at 2.5% per annum. There were no balances outstanding on these credit facilities at January 31, 2010.

Note 8—Commitments and Contingencies

     At any time, the Company may be involved in legal proceedings in addition to the Crucible, Collins and Aikman, and Avure matters described below. The Company’s policy is to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue and an analysis of historical experience. The Company records reserves related to legal matters for which it is probable that a loss has been incurred and the range of such loss can be estimated. With respect to other matters, management has concluded that a loss is only reasonably possible or remote and, therefore, no liability is recorded. Management discloses the facts regarding material matters assessed as reasonably possible and potential exposure, if determinable. Costs incurred defending claims are expensed as incurred.

     In litigation arising out of a June 2002 incident at a Crucible Metals’ (“Crucible”) facility, the Company’s excess insurance carrier notified the Company in December 2006 that it would contest its obligation to provide coverage for the property damage. The Company believes the carrier’s position is without merit, and following the commencement of a declaratory judgment action, the carrier agreed to provide the Company a defense. Following a recent mediation, the carrier agreed to settle the claims of Crucible. The carrier has chosen to continue to contest coverage for the settled claims relating to this incident which total approximately $7 million and the Company may spend substantial amounts to defend its position. The Company intends to vigorously contest the carrier’s claim; however, the ultimate outcome or likelihood of this specific claim cannot be determined at this time and an unfavorable outcome is reasonably possible.

     In June 2007, the Company received a claim seeking the return of amounts paid by Collins and Aikman Corporation, a customer, as preference payments. The amount sought was approximately $1 million. The Company settled this claim during the second quarter of fiscal 2010 for $120,000.

     In fiscal year 2009, the Company was notified by the purchaser of its Avure Business (“Purchaser”), which was reported as discontinued operations for the year ended April 30, 2006, that the Swedish Tax Authority was conducting an audit which included

periods during the time that Flow owned the subsidiary. Pursuant to an Indemnification Agreement with the purchaser, the Company had made certain commitments to indemnify various liabilities and claims, including any tax matters when the Company owned the business. The Swedish tax authority concluded its audit and issued a final report in November 2009 asserting that Avure owes 19.5 million Swedish Krona in additional taxes, penalties and fines. While the Company intends to contest the findings by the Swedish Tax Authority, an equivalent of $1.2 million was accrued as of January 31, 2010 related to the periods during which it owned Avure. This amount was accounted for as an adjustment to the loss on the disposal of the Avure Business and is reported as a charge to discontinued operations in the Company’s Condensed Consolidated Statement of Operations. The balance of the assessed amount will fluctuate period over period with changes in foreign currency rates.

     Other Legal Proceedings — For matters other than those described above, the Company does not believe these proceedings will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Note 9 — Shareholders’ Equity

     Sale of Common Stock

     In September 2009, the Company completed an underwritten public offering of 8,998,750 shares of common stock at an offering price of $2.10 per share, which included 1,173,750 shares issued as a result of the underwriter’s exercise of their over-allotment option in full. The offering generated net proceeds of approximately $17.1 million after deducting underwriting commissions and estimated offering expenses. The proceeds from this offering were used to reduce the Company’s outstanding debt, including amounts outstanding under its Senior Credit Facility.

     Change to Authorized Stock

     In September 2009, the Company filed Articles of Amendment of Restated Articles of Incorporation with the Washington Secretary of State (the “Articles of Amendment”). Prior to the filing of the Articles of Amendment, the Restated Articles of Incorporation of the Company provided for the authorization of two classes of stock, consisting of 49,000,000 shares designated as common stock, and 1,000,000 shares designated as preferred stock. In connection with the Articles of Amendment, the authorized stock of the Company has been increased to 85,000,000 shares, consisting of 84,000,000 shares of common stock and 1,000,000 shares of preferred stock. The Articles of Amendment were approved by the Board of Directors of the Company and by the shareholders of the Company on September 10, 2009. All other provisions of the Company’s Restated Articles of Incorporation remain the same.

     The Rights Agreement

     The Company entered into a Rights Agreement, effective as of September 1, 2009, between the Company and Mellon Investor Services LLC, as Rights Agent (the “Rights Agent”). The Rights Agreement replaced the Company’s existing Preferred Share Rights Purchase Plan, which had been in effect since 1990 and that expired on September 1, 2009. On August 28, 2009, the Board of Directors of the Company declared a dividend of one common share purchase right (a “Right”) for each outstanding share of common stock, $0.01 par value per share of the Company. Each Right entitles the registered holder to purchase from the Company one share of Common Stock at a price per share of $18.00 (as the same may be adjusted, the “Purchase Price”).

     The Rights are not exercisable until after the date of commencement of, or the first public announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person (other than an Exempted Entity) or group of 15% or more of the shares of Common Stock then outstanding (the earlier of such dates being herein referred to as the “Distribution Date”. The Rights will expire on September 1, 2019 (the “Final Expiration Date”), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case as described below. The Purchase Price payable, and the number of shares of Common Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Common Stock, (ii) upon the grant to holders of the Common Stock of certain rights or warrants to subscribe for or purchase Common Stock at a price, or securities convertible into Common Stock with a conversion price, less than the then-current market price of the Common Stock or (iii) upon the distribution to holders of the Common Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in Common Stock) or of subscription rights or warrants (other than those referred to above).

Note 10—Stock-based Compensation

     The Company recognizes share-based compensation expense for all share-based payment awards based on fair value. The Company maintains a stock-based compensation plan (the “2005 Plan”) which was adopted in September 2005 to attract and retain the most talented employees and promote the growth and success of the business by aligning long-term interests of employees with those of shareholders. At the Annual Meeting of Shareholders held on September 10, 2009, shareholders of the Company approved an amendment to the 2005 Plan which provided for an increase in the aggregate number of shares of common stock that may be issued pursuant to this Plan from 2,500,000 shares to 5,000,000 shares issuable in the form of stock, stock units, stock options, stock appreciation rights, or cash awards.

Stock Options

     The Company grants stock options to employees of the Company with service and/or performance conditions. The compensation cost of service condition stock options is based on their fair value at the grant date and recognized ratably over the service period. Compensation cost of stock options with performance conditions is based upon current performance projections and the percentage of the requisite service that has been rendered. All options become exercisable upon a change in control of the Company unless the surviving company assumes the outstanding options or substitutes similar awards for the outstanding awards of the 2005 Plan. Options are granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The maximum term of options is 10 years from the date of grant.

     The following table summarizes stock option activities for the nine months ended January 31, 2010:

														Weighted-
						Weighted-								Average
						Average				Aggregate				Remaining
		Number of				Exercise				Intrinsic				Contractual
		Options				Price				Value				Term (Years)
Outstanding at May 1, 2009			798,810			$	10.49			$	—				5.16
Granted during the period			—				—
Exercised during the period			—				—
Expired or forfeited during the period			(168,728	)			10.52
Outstanding at January 31, 2010			630,082			$	10.49			$	—				5.20
Exercisable at January 31, 2010			392,622			$	10.51			$	—				3.55

     There were no options exercised for the nine months ended January 31, 2010 and 2009.

     The Company uses the Black-Scholes option-pricing model to calculate the grant-date fair value of its stock options. There were no options granted during the nine months ended January 31, 2010. Information pertaining to the Company’s assumptions to calculate the fair value of the stock options granted during the nine months ended January 31, 2009 was as follows:

		Nine Months ended
		January 31, 2009
Options granted			236,210
Weighted average grant-date fair value of stock options granted		$	5.67
Assumptions:
Weighted average expected volatility			60	%
Risk-free interest rate			3.09	%
Weighted average expected term (in years)			6
Expected dividend yield			—

     The Company uses historical volatility in estimating expected volatility and historical employee exercise activity and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The risk-free interest rate assumption is based on U.S. Treasury constant maturity interest rate whose terms are consistent with the expected term of the Company’s stock options. The Company has not declared or paid any cash dividends on its common stock and does not anticipate that any dividends will be paid in the foreseeable future.

     For the respective nine months ended January 31, 2010 and 2009, the Company recognized compensation expense related to stock options of $435,000 and $478,000. As of January 31, 2010, total unrecognized compensation cost related to nonvested stock options was $1.0 million, which is expected to be recognized over a weighted average period of 1.9 years.

Service-Based Stock Awards

     The Company grants common stock or stock units to employees and non-employee directors of the Company with service conditions. Each non-employee director is eligible to receive and is granted common stock worth $40,000 annually. The compensation cost of the common stock or stock units are based on their fair value at the grant date and recognized ratably over the service period.

     The following table summarizes the service-based stock award activities for employees for the nine months ended January 31, 2010:

						Weighted-
						Average
		Number of				Grant-date
		Shares				Fair Value
Nonvested at May 1, 2009			402,555			$	8.78
Granted during the period			1,068,610				2.23
Forfeited during the period			(133,220	)			4.61
Vested during the period			(50,149	)			10.18
Nonvested at January 31, 2010			1,287,796			$	3.72

     For the respective nine months ended January 31, 2010 and 2009, the Company recognized compensation expense related to service-based stock awards of $1.0 million and $995,000. As of January 31, 2010, total unrecognized compensation cost related to such awards of $3.4 million is expected to be recognized over a weighted average period of 2.4 years.

Note 11—Basic and Diluted Loss per Share

     Basic loss per share represents loss available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted loss per share represents loss available to common shareholders divided by the weighted average number of shares outstanding, including the potentially dilutive impact of stock options, where appropriate. Potential common share equivalents of stock options and warrants are computed by the treasury stock method and are included in the denominator for computation of earnings per share if such equivalents are dilutive.

     The following table sets forth the computation of basic and diluted loss from continuing operations per share for the respective three and nine months ended January 31, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2010				2009				2010				2009
Numerator:
Loss from continuing operations		$	(798	)		$	(20,677	)		$	(7,507	)		$	(18,748	)
Denominator:
Denominator for basic and diluted loss per share—weighted average shares outstanding			46,879				37,639				42,490				37,609
Basic and diluted loss from continuing operations per share		$	(0.02	)		$	(0.55	)		$	(0.18	)		$	(0.50	)

     There were 940,617 potentially dilutive common shares from employee stock options and stock units which have been excluded from the diluted weighted average share denominator for the three and nine months ended January 31, 2010 as their effect would be antidilutive. There were 1,267,403 and 1,321,740 potentially dilutive common shares from employee stock options and stock units which were excluded from the diluted weighted average share denominator for the respective three and nine months ended January 31, 2009, as their effect would be antidilutive.

Note 12—Other Income (Expense), Net

     The Company’s subsidiaries have adopted the local currency of the country in which they operate as the functional currency. All assets and liabilities of these foreign subsidiaries are translated at period-end rates. Income and expense accounts of the foreign subsidiaries are translated at the average rates in effect during the period. Assets and liabilities (including inter-company accounts that are transactional in nature) of the Company which are denominated in currencies other than the functional currency of the entity are translated based on current exchange rates and gains or losses are included in the Condensed Consolidated Statements of Operations.

     The following table shows the detail of Other Income (Expense), net, in the accompanying Condensed Consolidated Statements of Operations:

		Three Months								Nine Months
		Ended January 31,								Ended January 31,
		2010				2009				2010				2009
Realized Foreign Exchange Gains (Losses), net		$	(1,315	)		$	206			$	(1,143	)		$	674
Unrealized Foreign Exchange Gains (Losses), net			136				(581	)			189				(1,524	)
Other			(39	)			767				88				794
		$	(1,218	)		$	392			$	(866	)		$	(56	)

     During the third quarter of fiscal year 2010, the Company recorded a $1.3 million foreign currency translation adjustment related to the liquidation of two dormant subsidiaries as a realized foreign exchange loss. This non-cash charge was previously recorded as an unrealized foreign exchange loss in the Company’s currency translation account as a component of other comprehensive income. There were no similar transactions in the respective three and nine months ended January 31, 2009 as the changes in other income and expense primarily resulted from the fluctuation in realized and unrealized foreign exchange gains and losses.

Note 13—Income Taxes

     The Company recognizes a net deferred tax asset for items that will generate a reduction in future taxable income to the extent that it is “more likely than not” that these deferred assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which the tax benefit will be realized. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the tax benefit will be realized. In determining the realizability of these assets, the Company considered numerous factors, including historical profitability, estimated future taxable income and the industry in which it operates. In fiscal year 2008, the Company reversed approximately $17.2 million and $1 million of valuation allowance against deferred tax assets related to U.S. and Germany net operating loss (NOL) carryforwards and other net deferred tax assets, respectively, after concluding that it was more likely than not that these benefits would be realized based on cumulative positive results of operations and anticipated future profit levels. The Company updates this evaluation taking into consideration the impact of current operations and any anticipated changes in future profit levels on a quarterly basis. At January 31, 2010, the recorded amount of the Company’s deferred tax assets was $21.6 million, net of valuation allowance on certain foreign NOLs.

     For the three and nine months ended January 31, 2010, the Company recorded an income tax benefit of $1.1 million and $2.7 million, respectively compared to income tax benefit of $11.1 million and $6.3 million, respectively in the comparative prior year. For the three months ended January 31, 2010, the relationship between income tax expense and pre-tax income is not customary due to changes in the estimate of the Company’s projected annual effective tax rate, and the impacts these changes have on the higher pre-tax loss for the three months ended January 31, 2010 ($1.9 million), in comparison to the pre-tax loss for the nine month period ended January 31, 2010 ($10.2 million).

     The Company has analyzed its filing positions in all of the federal, state, and international jurisdictions where it, or its wholly-owned subsidiaries, are required to file income tax returns for all open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non- U.S. income tax examinations by tax authorities for years prior to fiscal 2002. There are no significant uncertain tax positions in tax years prior to fiscal year 2002. As of January 31, 2010, the Company’s balance of unrecognized tax benefits was $8.8 million, which, if recognized, would reduce the Company’s effective tax rate. There have been no significant adjustments proposed relative to the Company’s tax positions since May 1, 2009. The Company has recognized immaterial interest charges related to unrecognized tax benefits as a component of interest expense. The Company does not expect that unrecognized tax benefits will significantly change within the next twelve months other than for currency fluctuations.

     With the exception of certain of its subsidiaries, it is the general practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of January 31, 2010 the Company has not made a provision for U.S. or additional foreign withholding taxes of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries with the exception of its subsidiaries in Taiwan, Japan, and Switzerland for which it provides deferred taxes. During the nine months ended January 31, 2010, the Company repatriated a total of $192,000, net of tax of $38,000 from one foreign subsidiary, and the Company plans to continue repatriating additional funds from this subsidiary in the future. The Company repatriated $1.6 million, net of tax of $329,000, from two of its foreign subsidiaries in the comparative prior period.

Note 14—Discontinued Operations

     The Company recorded a charge of $1.2 million for the nine months ended January 31, 2010 as an adjustment to the loss on the disposal of the Avure Business which was reported as discontinued operations for the year ended April 30, 2006. Refer to further discussion on this charge in Note 8 — Commitments and Contingencies.

     In April 2008, the Company decided to sell or otherwise dispose of its CIS Technical Solutions division (“CIS” division), which would have been reported as part of its Advanced segment. The Company ceased its efforts to sell the CIS division and closed its operations effective January 2009. The financial results of the CIS division have been reported as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The Condensed Consolidated Balance Sheets as of January 31, 2010 and April 30, 2009 and the Condensed Consolidated Statements of Cash Flows for the periods ended January 31, 2010 and 2009 do not reflect discontinued operations treatment for the CIS division as the related amounts are not material.

     Summarized financial information for the CIS discontinued operations for the three and nine months ended January 31, 2009 is set forth below:

		Three Month Ended				Nine Months Ended
		January 31, 2009				January 31, 2009
Sales		$	190			$	1,602
Loss before provision for income taxes			(732	)			(597	)
Benefit for income taxes			46				—
Loss from operations of discontinued operations		$	(686	)		$	(597	)

Note 15—Segment Information

     The Company has two reportable segments: Standard and Advanced. The Standard segment includes sales and expenses related to the Company’s cutting and cleaning systems using ultrahigh-pressure water pumps, as well as parts and services to sustain these installed systems. Systems included in this segment do not require significant custom configuration. The Advanced segment includes sales and expenses related to the Company’s complex aerospace and automation systems which require specific custom configuration and advanced features to match unique customer applications as well as parts and services to sustain these installed systems.

     Segment operating results are measured based on revenue growth, gross margin, and operating income. A summary of operations by reportable segment is as follows:

														Inter-
														segment
		Standard (i)				Advanced				All Other (ii)				Eliminations (iii)				Total
Three Months Ended January 31, 2010
External sales		$	37,036			$	8,320			$	—			$	—			$	45,356
Inter-segment sales			537				—				—				(537	)
Gross margin			15,269				2,954				—				—				18,223
Operating income (loss)			978				1,229				(2,482	)			—				(275	)
Three Months Ended January 31, 2009
External sales		$	41,269			$	7,442			$	—			$	—			$	48,711
Inter-segment sales			782				—				—				(782	)
Gross margin			16,957				2,189				—				—				19,146
Operating income (loss)			2,441				628				(34,896	)			—				(31,827	)
Nine Months Ended January 31, 2010
External sales		$	96,817			$	28,328			$	—			$	—			$	125,145
Inter-segment sales			1,313				—				—				(1,313	)
Gross margin			39,216				9,615				—				—				48,831
Operating income (loss)			(211	)			4,999				(12,308	)			—				(7,520	)
Total Assets			127,471				29,632				11,185				(35,101	)			133,187
Nine Months Ended January 31, 2009
External sales		$	149,898			$	16,455			$	—			$	—			$	166,353
Inter-segment sales			1,997				—				—				(1,997	)
Gross margin			66,934				3,983				—				—				70,917
Operating income (loss)			21,592				(3,417	)			(42,807	)			—				(24,632	)
Total Assets			153,361				23,129				8,711				(35,662	)			149,539

     A summary reconciliation of total segment operating income to total consolidated income from continuing operations before provision for income taxes is as follows:

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2010				2009				2010				2009
Operating loss for reportable segments		$	(275	)		$	(31,827	)		$	(7,520	)		$	(24,632	)
Interest income			39				94				132				396
Interest expense			(468	)			(442	)			(1,906	)			(733	)
Other income (expense), net			(1,218	)			392				(866	)			(56	)
Loss from continuing operations before provision for income taxes		$	(1,922	)		$	(31,783	)		$	(10,160	)		$	(25,025	)

Note 16—Fair Value Measures

     The Company discloses and classifies fair value measurements in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

     The Company selectively utilizes forward exchange rate contracts to hedge its exposure to adverse exchange rate fluctuations on foreign currency denominated accounts receivable and accounts payable (both trade and inter-company). The Company records derivatives at fair value. Historically, such derivatives have consisted primarily of foreign currency forward contracts for which hedge accounting has not been applied. The Company has therefore marked such forward contracts to market with an unrealized gain or loss for the mark-to-market valuation. Such forward contracts have been classified under Level 2 because such measurements are determined using published market prices or estimated based on observable inputs such as future exchange rates.

     The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the respective three and nine months ended January 31, 2010 and 2009 was as follows:

		Location of Gain or
Derivatives not designated as hedging		(Loss) Recognized in				Three Months								Nine Months
instruments under Statement 133		Income on Derivative				Ended January 31,								Ended January 31,
						2010				2009				2010				2009
		Other Income
Forward exchange forward contracts		(Expense)				$	—			$	30			$	—			$	1,249

     There were no open forward contracts as of January 31, 2010 and April 30, 2009. Accordingly, the Company had no financial assets and liabilities that qualified for fair value measurement and disclosure.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

     Nonfinancial nonrecurring assets and liabilities included on the Company’s Condensed Consolidated Balance Sheets consist of long-term subordinated notes issued to OMAX, long lived assets, including cost-method investments, that are measured at fair value to test for and measure an impairment charge, when necessary.

     The carrying values of the Company’s current assets and liabilities due within one-year approximate fair values due to the short-term maturity of these instruments.

     In fiscal year 2010, the Company had an initial measurement of long-term subordinated notes issued to OMAX. The carrying amount of these notes as of January 31, 2010 was $7.8 million which approximates the fair value as of that date, and the notes were issued to OMAX during the second quarter of fiscal year 2010. In calculating the fair value of these notes, the Company used a four-year maturity date of August 17, 2013 and a discount rate of 10% which is the rate at which management believes the Company can obtain financing of a similar nature from other sources.

FLOW INTERNATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

     Forward-looking statements in this report, including without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “may,” “expect,” “believe,” “anticipate,” “estimate,” “plan” and similar expressions are intended to identify forward-looking statements. These statements are no guarantee of future performance and involve certain risks, assumptions, and uncertainties that are difficult to predict. Therefore, actual outcome and results may differ materially from what is expressed or forecasted in such forward-looking statements.

     We make forward-looking statements of our expectations which include but are not limited to:

	•		statements regarding the successful execution of our strategic initiatives, including introduction of new products and realignment of our existing product line;
	•		statements regarding our ability to respond to a decline in the near-term demand for our products by cutting costs and our intention to reinstate suspended employee benefits, including wage reductions, as our business improves;
	•		statements regarding our belief that the diversity of our markets, along with the relatively early adoption phase of our technology, and the displacement of more traditional methods for machining and fabricating, will enable us to absorb the economic downturn with less impact than conventional machine tool manufacturers;
	•		statements regarding the realization of backlog in the Advanced segment;
	•		statements regarding the use of cash, cash needs and ability to raise capital and/or use our Senior Credit Facility;
	•		statements regarding our belief that our existing cash and cash equivalents, along with the expected proceeds from our operations and available amounts under our Senior Credit Facility, will provide adequate liquidity to fund our operations through at least the next twelve months;
	•		statements regarding our ability to meet our debt covenants in future periods;
	•		statements regarding our technological leadership position;
	•		statements regarding anticipated results of potential or actual litigation;
	•		statements regarding our expectation that our unrecognized tax benefits will not change significantly within the next twelve months.

     There may be other factors not mentioned above or included in our SEC filings that may cause our actual results to differ materially from those in any forward-looking statement. You should not place undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events or developments, except as required by federal securities laws.

     The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes included elsewhere in this Form 10-Q.

     Our MD&A includes the following major sections:

	•		Executive Summary
	•		Results of Operations
	•		Liquidity and Capital Resources
	•		Contractual Obligations
	•		Off Balance Sheet Arrangements
	•		Critical Accounting Policies and Estimates
	•		Recently Issued Accounting Pronouncements

Executive Summary

     We are a technology-based global company whose objective is to deliver profitable dynamic growth by providing technologically advanced waterjet cutting and cleaning systems to our customers. To achieve this objective, we offer versatile waterjet cutting and industrial cleaning systems and we strive to expand market share in our current markets; continue to identify and penetrate new markets; capitalize on our customer relationships and business competencies; develop and market innovative products and diverse applications; continue to improve operating margins by focusing on operational improvements; and pursue additional channels and partners for distribution.

     In September 2009, we completed a public offering of 8,998,750 common shares at an offering price of $2.10 per share, which included 1,173,750 shares issued as a result of the underwriter fully exercising its over-allotment option. The offering generated net proceeds of approximately $17.1 million after deducting underwriting commissions and estimated offering expenses. The proceeds from this offering were used to reduce a significant portion of our outstanding debt, including amounts outstanding under our Senior Credit Facility.

     In connection with this sale of common stock, we amended our Senior Credit Facility in August 2009. This amendment revised the financial covenants that we are required to maintain, providing us with more flexibility to operate our business in this economic environment. Refer to the Liquidity and Capital Resources section for further detail on this amendment.

     In the prior year, we took important steps to strengthen the Company even as we responded to the global economic crisis by systematically and aggressively cutting costs in order to generate positive cash flow from operations. We reduced our global manufacturing footprint from four factories to two, exited two unprofitable businesses, and reduced total headcount by nearly 20%. We also settled a major outstanding patent lawsuit, removing a potential long-term risk.

     As a result of the continued decline in sales activity along with the uncertainty regarding the timing of an economic recovery, we continued to focus on lowering our operating costs and creating efficiencies in the fourth quarter of fiscal 2009 and the first quarter of this fiscal year. Some of the cost cutting initiatives implemented in the fourth quarter of fiscal 2009 and the first quarter of fiscal 2010 included the following:

	•		temporary reduction of wages for the majority of our salaried employees;
	•		temporary suspension of certain employee benefits;
	•		culmination of our plan to exit all manufacturing activities in our Taiwan facility; and
	•		elimination of 30 full-time positions globally.

     The financial impact of the actions above results in potential annualized savings in excess of approximately $6 million, which commenced in the second quarter of fiscal year 2010. We incurred charges of $1.6 million during the first quarter of fiscal 2010 in conjunction with the staff reductions noted above. These charges are included in “Restructuring and Other Operating Charges” in our Condensed Consolidated Statement of Operations for the nine months ended January 31, 2010 and were offset by a $600,000 gain recognized on the sale of our building in Hsinchu, Taiwan during the second quarter of fiscal 2010, which concluded our efforts to consolidate our manufacturing activities.

     We continue to invest in future growth initiatives such as product and research development and expanding our distributor network, which are critical to maintaining our competitive advantage in the future. In the first quarter of our current fiscal year we launched our new Mach Series of waterjet cutting equipment, Mach 2, 3, and 4, which featured the next generation of waterjet technology. The new Mach Series equipment combines the latest software upgrades, ultrahigh pressures, new long-life pumps, and three-dimensional Dynamic^® Waterjet cutting advancements, all of which are designed to deliver maximum versatility to customers. In addition, we have added 39 distributors in 31 countries since the beginning of the calendar year 2009, adding an indirect sales channel to our existing direct sales force, increasing our ability to exit the recession quicker and broaden our sales exposure.

     While we cannot be certain of an economic recovery in the near term, we are encouraged by the modest rebound in sales. The third quarter of fiscal 2010 represents the second sequential quarter of revenue growth since the recession began. As a result, while we continue to remain cautious with our operating expenses, during the current quarter we reinstated some of the temporary wage reductions and employee benefits that had previously been suspended. We will continue to carefully monitor our sales volume and other economic indicators and review our ability to reinstate the temporary cost reductions on a phased-in approach.

     Our ability to fully implement our strategies and achieve our objective may be influenced by a variety of factors, many of which are beyond our control. These risks and uncertainties pertaining to our business are set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended April 30, 2009.

Results of Operations

(Tabular amounts in thousands)

Summary Consolidated Results for the Three Months ended January 31, 2010 and 2009

		Three Months Ended January 31,												Nine Months Ended January 31,
		2010				2009				%				2010				2009				%
Sales		$	45,356			$	48,711				(7	)%		$	125,145			$	166,353				(25	)%
Operating Loss			(275	)			(31,827	)			99	%			(7,520	)			(24,632	)			70	%

		Three Months Ended January 31,												Nine Months Ended January 31,
		2010				2009				%				2010				2009				%
Sales
Systems		$	31,905			$	33,739				(5	)%		$	83,673			$	115,997				(28	)%
Consumable parts			13,451				14,972				(10	)%			41,472				50,356				(18	)%
			45,356				48,711								125,145				166,353

     Sales for the three months ended January 31, 2010 decreased $3.4 million or 7% over the prior year period primarily driven by the comparatively weak economic environment and its impact on capital spending and expansion plans. We continued to experience sales declines in our Standard segment which declined $4.2 million or 10%. The majority of the decline was from North America and Europe standard systems and spares, which combined for a revenue decline of $2.9 million or 10% from the prior year period. These declines were partially offset by improved sales of $877,000 or 12% in our Advanced segment during the same period.

     Sales for the nine months ended January 31, 2010 decreased $41.2 million, or 25%, over the prior year comparative period with sales declines in our Standard segment of $53.3 million or 35%. The majority of the decline was from North America and Europe Standard systems and spares representing $42.3 million of this decline. These declines were partially offset by improved sales of $12.1 million in our Advanced segment during the same period.

     The operating loss of $275,000 for the three months ended January 31, 2010 decreased from an operating loss of $31.8 million in the prior year comparative period. The $31.8 million operating loss recorded for the three months ended January 31, 2009 included a $29.0 million provision for an open litigation with OMAX, which is further discussed in Note 6 – Other Accrued Liabilities of the Notes to the Condensed Consolidated Financial Statements, a goodwill impairment charge of $2.8 million, and severance expenses of $514,000 related to actions taken to reduce our global staffing levels in the prior year. Excluding these operating charges discussed above for the three months ended January 31, 2009, operating income decreased by $726,000, which was primarily driven by lower sales.

     For the nine months ended January 31, 2010, we recorded an operating loss of $7.5 million, which represents an improvement over the prior year comparative period operating loss of $24.6 million. The operating loss of $7.5 million for the nine months ended January 31, 2010 was primarily driven by the following:

	•		lower sales volume discussed above and gross margin mix;
	•		a decline of 361 basis points in gross margin as a result of a greater mix of low margin systems versus the prior year as well as higher manufacturing overhead costs;
	•		a net charge of $3.2 million to record the termination of our option to acquire OMAX Corporation, which is further discussed in Note 6 — Other Accrued Liabilities of the Notes to the Condensed Consolidated Financial Statements; and
	•		Restructuring and other related expenses of $1.6 million related to the reduction of global staffing levels and the completion of our Taiwan manufacturing operations shutdown in the first quarter of fiscal year 2010, offset by a $600,000 gain from the sale of our building in Hsinchu, Taiwan which was completed in September 2009.

     The above charges were partially offset by lower core operating expenses when compared to the prior year same period.

     Total systems sales were down by $1.8 million or 5%, and $32.3 million or 28% for the respective three and nine months ended January 31, 2010 over the prior year periods as a result of the comparatively weaker economic environment primarily in North America and Europe.

     Sales of consumable parts decreased $1.5 million or 10%, and $8.9 million or 18%, respectively for the three and nine months ended January 31, 2010 over the prior year comparative periods which was consistent with the prevailing economic conditions noted above.

Segment Results of Operations

     We have two reportable segments: Standard and Advanced. The Standard segment includes sales and expenses related to our cutting and cleaning systems using ultrahigh-pressure water pumps, as well as parts and services to sustain these installed systems. Systems included in this segment do not require significant custom configuration. The Advanced segment includes sales and expenses related to our complex aerospace and automation systems which require specific custom configuration and advanced features to match unique customer applications as well as parts and services to sustain these installed systems.

     This section provides a comparison of net sales and operating expenses for each of our reportable segments for the three and nine months ended January 31, 2010 and 2009, respectively. A discussion of corporate overhead and general expenses related to inactive subsidiaries which do not constitute segments has also been provided under “All Other”. For further discussion on our reportable segments, refer to Note 15 — Segment Information of the Notes to the Condensed Consolidated Financial Statements.

Standard Segment

		Three Months Ended January 31,												Nine Months Ended January 31,
		2010				2009				%				2010				2009				%
Sales		$	37,036			$	41,269				(10	)%		$	96,817			$	149,898				(35	)%
% of total company sales			82	%			85	%		NM					77	%			90	%		NM
Gross Margin (i)			15,269				16,957				(10	)%			39,216				66,934				(41	)%
Gross Margin as % of sales			41	%			41	%		NM					41	%			45	%		NM
Operating Expenses:
Sales and Marketing			9,402				9,313				1	%			24,982				29,871				(16	)%
Research and Engineering			1,789				2,043				(12	)%			4,899				5,814				(16	)%
General and Administrative			3,101				2,700				15	%			8,847				9,048				(2	)%
Restructuring Charges and Other			—				460			NM					699				609				15	%
Total Operating Expenses			14,292				14,516				(2	)%			39,427				45,342				(13	)%
Operating Income (Loss) (i)			978				2,441				(60	)%			(211	)			21,592			NM

For the three and nine months ended January 31, 2010:

     Sales in our standard segment decreased $4.2 million or 10%, and $53.1 million or 35% over the prior year comparative periods. Excluding the impact of foreign currency changes, sales in the Standard segment declined $5.1 million or 12% and $52.3 million or 35% for the respective three and nine months ended January 31, 2010 when compared to the prior year comparative periods. The quarter-to-date and year-to-date decline was primarily due to the following:

•

Significant decline in standard system sales volume, primarily in North America and Europe, which are the markets most affected by the current economic environment. These regions had a combined decline in system sales of $932,000 or 5% and $35.6 million or 46% for the respective three and nine months ended January 31, 2010 over the prior year comparative periods. Consumable parts revenue for this segment also declined by $1.0 million or 7% and $7.2 million or 15% for the respective three and nine months ended January 31, 2010 over the prior year comparative periods which was primarily driven by declines in North America and Europe, which had a combined decline of $2.0 million or 18% and $6.7 million or 18% for the respective three and nine months ended January 31, 2010 over the prior year comparative periods due to lower system utilization by our customers. These declines were offset by modest growth in consumable parts revenue in other regions.

     Gross margin for the three and nine months ended January 31, 2010 amounted to $15.3 million or 41%, and $39.2 million or 41% of sales compared to $17.0 million or 41%, and $66.9 million or 45% of sales in the prior year comparative periods. Generally, comparison of gross margin rates will vary period over period based on changes in our product sales mix and prices, and levels of production volume. The decline in our margins for the nine month period over the prior year comparative period was primarily attributable to a shift in product mix to comparatively lower margin systems as well as, and to a lesser extent, higher manufacturing overhead costs resulting from lower manufacturing volume.

     Operating expense changes consisted of the following:

	•		A decrease in sales and marketing expenses of $4.9 million or 16% for the nine months ended January 31, 2010, as compared to the prior year comparative periods, primarily as a result of lower commission expense based on lower sales volume as, well as reduced headcount related expenses. Sale and marketing expenses for the three months ended January 31, 2010 were consistent with the prior year comparative period;
	•		A decrease in research and engineering expenses of $254,000 or 13%, and $915,000 or 16% for the respective three and nine months ended January 31, 2010, as compared to the prior year comparative periods, which was mainly attributable to the timing of investments for new product development as well as reduced headcount related expenses;
	•		A decrease in general and administrative expenses of $201,000 or 2% for the nine months ended January 31, 2010, as compared to the prior year comparative period, primarily as a result of reduced headcount related expenses that occurred from the reduction of headcount in the first fiscal quarter of 2010. General and administrative expenses for the three months ended January 31, 2010 increased $401,000 or 15% compared with the prior year comparative period, primarily reflecting increased costs associated with the implementation of our Enterprise Resource Planning system and related depreciation and amortization; and
	•		Restructuring and Other Charges of $699,000 in the Standard segment for the nine months ended January 31, 2010 were related to charges recorded to reduce global staffing levels and to complete the cessation of manufacturing activity in our Taiwan facility. The expenses recorded to reduce global staffing levels were net of a $601,000 gain recorded in the second quarter of fiscal 2010 for the sale of our building in Taiwan.

Advanced Segment

		Three Months Ended January 31,												Nine Months Ended January 31,
		2010				2009				%				2010				2009				%
Sales		$	8,320			$	7,442				12	%		$	28,328			$	16,455				72	%
% of total company sales			18	%			15	%		NM					23	%			10	%		NM
Gross Margin			2,954				2,189				35	%			9,615				3,983			NM
Gross Margin as % of sales			36	%			29	%		NM					34	%			24	%		NM
Operating Expenses:
Sales and Marketing			663				683				(3	)%			1,974				2,124				(7	)%
Research and Engineering			446				238				87	%			883				995				(11	)%
General and Administrative			616				586				5	%			1,690				2,495				(32	)%
Restructuring Charges and Other			0				54				(100	)%			69				1,785				(96	)%
Total Operating Expenses			1,725				1,561				11	%			4,616				7,399				(38	)%
Operating Income (Loss)			1,229				628				96	%			4,999				(3,417	)		NM