Edgar Filing: FLOW INTERNATIONAL CORP

10K Draft

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K



R		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended April 30, 2011
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ______ to ______

Commission file number 01-34443

FLOW INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)



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

23500 64th Avenue South, Kent, WA		98032
(Address of principle executive offices)		(Zip Code)

Registrant's telephone number, including area code 253-850-3500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.01 Par Value, Common Share Purchase Rights		NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No R

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 R 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 (§ 229.405 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

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. 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 R	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 R

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $119,923,022 as of October 31, 2010, the last business day of the registrant's most recently completed second fiscal quarter, based on a closing price of $2.64 per share as quoted by the NASDAQ Stock Market as of such date. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

The registrant had 47,430,992 shares of Common Stock, $0.01 par value per share, outstanding as of June 14, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended April 30, 2011 (the “2011 Proxy Statement”). Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K. With the exception of such portions of the 2011 Proxy Statement expressly incorporated by into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Annual Report on Form 10-K.

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FLOW INTERNATIONAL CORPORATION

INDEX




			Page

PART I:
	Item 1	Business		5
	Item 1A	Risk Factors		10
	Item 1B	Unresolved Staff Comments		14
	Item 2	Properties		15
	Item 3	Legal Proceedings		15
	Item 4	(Removed and Reserved)		15

PART II:
	Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		15
	Item 6	Selected Financial Data		17
	Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations		17
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk		34
	Item 8	Financial Statements and Supplementary Data		36
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		68
	Item 9A	Controls and Procedures		68
	Item 9B	Other Information		71


PART III:
	Item 10	Directors, Executive Officers and Corporate Governance		71
	Item 11	Executive Compensation		71
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		71
	Item 13	Certain Relationships and Related Transactions, and Director Independence		71
	Item 14	Principal Accountant Fees and Services		71


PART IV:
	Item 15	Exhibits and Financial Statement Schedules		71
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-99.1

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Forward-Looking Statements

Forward-looking statements in this report, including without limitation, statements relating to our 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 the following examples:


•	statements regarding our belief that we are well positioned to continue growing our business organically over the long-term by enhancing our product offerings and expanding our customer base through our global channels of disctibution;


•	statements regarding our belief the efforts we undertook during the economic downturn will provide us the opportunity to scale manufacturing in a low cost fashion as demand for our products increases;


•	statements regarding improving cost structure, improved capacity utilization and operating efficiencies;


•	statements regarding our belief that the diversity of our products and geographic presence along with the expansion of our indirect sales channel will continue to minimize the impact that any one country or economy has on our consolidated results;


•	statements regarding our belief that our channels of distribution are unparalleled in our industry and our ability to effectively manage them;


•	statements regarding the reasons for variations in Advanced segment revenues and gross margins;


•	statements regarding our belief that we will be successful in passing on inflationary cost pressures to our customers;


•	statements regarding increases in selling general and administrative expenses as we continue the rollout of global marketing initiatives and new product development;


•	statements regarding our use of cash, cash needs, generation of cash through operations, and ability to raise capital and/or use our 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 Credit Facility Agreement, will provide adequate liquidity to fund our operations through at least the next twelve months;


•	statements regarding our ability to fund future capital spending through cash from operations and/or from external financing;


•	statements regarding our ability to meet our debt covenants in future periods;


•	statements regarding our technological leadership position and our belief that our technological capabilities for developing products with superior characteristics provide us potential growth opportunities as well as a competitive advantage;


•	statements regarding our expectation that our Enterprise Resource Planning system will provide meaningful benefits over the long-term as we transform business and financial processes;


•	statements regarding anticipated results of potential or actual litigation;


•	statements regarding the realizability of our deferred tax assets and 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

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developments, except as required by federal securities laws.

PART I

Item 1. Description of the Business

Business Overview

Flow International Corporation and its subsidiaries (hereinafter collectively referred to as “the Company”, “we”, or “our” unless the context requires otherwise) is a global technology-based company providing customer-driven waterjet cutting, surface preparation and cleaning solutions. Our ultrahigh-pressure water pumps generate pressures from 40,000 to over 94,000 pounds per square inch (psi) and power waterjet systems that are used to cut and clean materials. Waterjet cutting is a fast-growing alternative to traditional methods, which utilize lasers, saws, knives, shears, plasma, electrical discharge machining ("EDM"), routers, drills, soda blasting and abrasive blasting techniques, and has uses in many applications from food and paper products to steel and carbon fiber composites.

This portion of our Form 10-K provides detailed information about who we are and what we do. Unless otherwise specified, current information reported in this Form 10-K is as of, or for the fiscal year ended April 30, 2011.

Our History

Flow International Corporation was incorporated in Delaware in 1983 as Flow Systems, Inc. and was reincorporated in Washington in October 1998. Our innovations and accomplishments through the years include:

Prior to the 1990s, we:


•	invented the abrasive waterjet; and


•	led the waterjet industry in the use of pure waterjet cutting for disposable diapers and tissue.

In the 1990s, we;


•	developed the first 55,000 psi direct drive pumps;


•	developed the first 60,000 psi intensifier and the first 87,000 psi intensifier;


•	introduced Windows^R-based intelligent waterjet control software - FlowMaster^TM - to the industry for abrasive waterjet flat stock cutting machine tools;


•	developed the first fully integrated cutting machine tool with all functions and diagnostic sensors centralized at the operator control station;


•	invented the UltraPierce accessory for the piercing of composites, stone, glass, ceramics without delaminating or breakage of material during the drilling process; and


•	developed the first multi-process 3-dimensional cutting large envelope machines for trimming and drilling of composite aerospace wings and structures using abrasive waterjet, routers, and inspection.

In the 2000s, we:


•	invented Dynamic Waterjet^R with Active Tolerance Control to produce parts two to four times faster and with tolerances down to one to three thousandths of an inch;


•	invented the first collision and height sensor, the Dynamic Contour Follower, for Dynamic Waterjet^R applications;


•	developed the first 94,000 psi rated intensifier pump for commercial cutting applications;


•	developed the first extremely high speed pure waterjet machine, the Sonic, for Gasket and foam production; and


•	introduced Dynamic Waterjet XD, a 3-dimensional waterjet cutting technology that uses SmartStream^TM.

Our Business Strategy

We are a global technology-based manufacturing company committed to providing a world class customer experience. We offer technological leadership and exceptional waterjet performance to a wide-ranging customer base. Our versatile technology benefits many cutting and cleaning applications, delivering profitable waterjet solutions and dynamic business growth opportunities to our customers.

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We believe that, by growing our revenues and operating income, successfully improving our business and manufacturing processes, and maximizing our cash flows, we will deliver enhanced financial performance, and also position us to capitalize on growth opportunities that may arise. Our business strategies are designed to expand upon our competitive advantages by providing the following:

Broadest Product Line and Unmatched Customer Access in the Waterjet Industry. We offer a broad product line that encompasses a complete array of capabilities, technologies and price points. Our product offerings range from large custom built composite machining solutions and turnkey shape-cutting systems to environmentally-friendly ultrahigh-pressure surface preparation systems.

We believe our channels of distribution are unparalleled in the industry. With years of expertise, our direct sales force enhances customer experience by using a consultative sales approach. This direct channel of sales is augmented by our indirect sales partners who primarily focus on selling mid to lower priced products.

Breakthrough Product Development. We believe that our technological capabilities for developing products with superior characteristics provide us potential growth opportunities as well as a competitive advantage. We seek to exploit these capabilities and our intellectual property portfolio to accelerate development and commercialization of these technologies as well as to improve existing products.

Low Cost Manufacturing. We continue to focus on initiatives to increase efficiency in all of our manufacturing plants aimed at creating flow within processes which should enable us to continuously become more efficient. We believe that the efforts we undertook during the economic downturn will provide us the opportunity to scale manufacturing in a low cost fashion as demand for our products increases.

Operating Expense Leveraging Opportunity. In fiscal year 2009, we commenced the implementation of an enterprise-wide project to implement a new Enterprise Resource Planning (ERP) system, to support a majority of our business processes and further streamline our operations. This multi-year implementation will continue to occur in the near-term and is expected to provide meaningful benefits over the long-term as we transform business and financial processes in order to realize the full benefits of the project.

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. Refer to discussion of some of these factors under Item 1A: Risk Factors.

Products and Services

Our mission is to provide the highest value customer-driven waterjet cutting, surface preparation and cleaning solutions. We strive to improve our customers' profitability through the development of innovative products and services that expand our customers' markets and increase their productivity.

The primary components of our product line include versatile waterjet cutting, surface preparation and industrial cleaning systems which provide total system solutions for many materials including metal, stone, tile, composites, food, paper, rubber, structural foam and many more. We have a wide variety of customer types ranging from small job shops to major industrial companies.

Our ultrahigh-pressure technology has two broad applications: cutting, surface preparation and cleaning.

Waterjet Cutting. The primary application of our ultrahigh-pressure water pumps is cutting. In cutting applications, an ultrahigh-pressure pump pressurizes water from 40,000 to 94,000 rated psi, and forces it through a small orifice, generating a stream of water traveling at supersonic speeds. In order to cut metallic and other hard materials, an abrasive substance, usually garnet, is added to the waterjet stream creating an abrasive jet. Our cutting systems typically include a robotic manipulator that moves the cutting head, either 2-dimensionally or 3-dimensionally. Our systems may also combine waterjet with other applications such as material handling, conventional machining, routing inspection, assembly, and other automated processes. Our waterjet cutting systems cut virtually any shape in a single step with edge quality that usually requires no secondary finishing and are the most productive solutions for cutting a wide range of materials from 1/16 inch to over 24 inches thick. We offer two different pump technologies: ultrahigh-pressure intensifier and direct drive pumps, ensuring our customers get the pump that is right for them and their unique application. Our intensifier pumps can deliver water continuously at up to 94,000 psi, and our direct drive pumps up to 55,000 psi.

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Waterjet cutting is recognized as a more flexible, cost effective and accurate alternative to traditional cutting methods such as lasers, EDM, saws or plasma. It offers greater versatility in the types of products it can cut, and, because it cuts without creating appreciable heat or mechanical stress and often reduces or eliminates the need for secondary processing operations and special fixturing. Waterjet cutting has applications in many industries, including aerospace, defense, automotive, semiconductors, disposable products, food, glass, sign, metal cutting, marble, tile and other stone cutting, and paper slitting and trimming.

Surface Preparation and Industrial Cleaning Products. Our ultrahigh-pressure surface preparation and industrial cleaning systems are used in waterjet cleaning for fast coating removal. These systems use direct drive pumps to create pressures in the range of 40,000 to 55,000 psi. Because only pure water is used to remove coatings, waterjetting costs less than grit blasting by eliminating the need for collection, containment, and disposal of abrasive. Removing coatings with water instead of grit allows other work to be done at the same time as the waterjet operation and reduces containment and cleanup issues. Steel, mechanical and electrical work, or painting, can be performed concurrently with waterjet industrial cleaning, which means projects are completed in less time and there are fewer environmental concerns than with traditional methods such as sandblasting.

Parts and Services. We also offer consumable parts and services. Consumables represent parts used by the pump and cutting head during operation, such as seals and orifices. Many of the consumable parts are proprietary in nature and are patent protected. We also sell various tools and accessories which incorporate ultrahigh-pressure technology.

Marketing and Customers

Our marketing emphasizes a consultative application-oriented sales approach and is centered on increased awareness of the capabilities of our technology as we believe that waterjet technology is still in the early adoption phase of its product life cycle. These efforts include presence at trade shows, advertising in print and online media, telemarketing and other product placements and demonstration/educational events as well as an increase in domestic and international sales representation, including distributors. To enhance sales efforts, our marketing staff and sales force gather detailed information on applications and requirements in targeted market segments. This information is used to develop standardized and customized solutions using ultrahigh-pressure and robotics technologies.

We offer our consumable parts online at www.flowparts.com website in the U.S. and www.floweuropeparts.com in Europe. We strive to ensure that we are able to ship a large number of parts within 24 hours to our customers.

We have established strong relationships with a diverse set of customers. Our largest customer in the Advanced segment (refer to our discussion on the Business Segments below) accounted for approximately 11% of consolidated sales in fiscal year 2010. No single customer or group of customers under common control accounted for 10% or more of sales during any of the respective fiscal years ended April 30, 2011 and 2009.

We believe that the productivity-enhancing nature of our ultrahigh-pressure technology, the diversity of our markets along with the relatively early adoption phase of our technology, and the displacement of more traditional methods of machine tooling, fabricating and surface preparation will enable us to continue growing our market share in the machine cutting tool market as global economic market conditions improve.

Competition in Our Markets

Our major markets - both domestic and foreign - are highly competitive, with our products competing against other waterjet competitors as well as technologies such as lasers, saws, plasma, shears, routers, drills, and abrasive blasting techniques. Waterjet cutting systems offer manufacturers many advantages over traditional cutting machines including an ability to cut or machine virtually any material, in any direction, with improved manufacturing times, and with minimal impact on the material being cut. These factors, in addition to the elimination of secondary processing in many circumstances, enhance the manufacturing productivity of our systems. Approximately 80 firms, other than Flow, have developed tools for cleaning and cutting based on waterjet technology. Most of our waterjet competitors provide only portions of a waterjet system such as pumps or control systems. Other competitors integrate components from a variety of suppliers to provide a complete solution.

We believe that the breadth of our product offering enables us to match a diverse base of customers' applications and budgets. Our competitive strength in the high-end segment of the market stems from our leading-edge technological and engineering capabilities which enable us to deliver custom engineered solutions that revolutionize the machining and tooling industries. In the mid-tier segments of the waterjet cutting and surface preparation markets, we compete on the basis of product quality and innovation, distribution presence and capability, channel knowledge and expertise, geographic availability, breadth of product line, access speed and performance, reliability, and price competitiveness. We compete in the economy market

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segment, the lowest-tier in our market, on the basis of geographic availability, reliable segment-leading technology and product value.

We estimate that the waterjet cutting solutions market opportunity exceeds $1 billion in annual revenue potential or more than twice the current level. The total market potential continues to grow as new applications are developed. The rapidly increasing global market for waterjet solutions, while providing high growth opportunities, is also attracting new market entrants which will increase competition.

In addition to pumps and systems, we sell consumable parts and services. We believe our on-time delivery and technical service combine for the best all-around value for our customers but, we face competition from numerous other companies who sell non-proprietary replacement parts for our machines. While they generally offer a lower price, we believe the quality of our parts, coupled with our service, makes us the value leader in consumable parts.

Business Segments

We report our operating results to our Chief Executive Officer, who is the chief operating decision maker, based on market segments which is consistent with management's long-term growth strategy. Our reportable segments are Standard and Advanced. The Standard segment includes sales and cost of sales related to our cutting, surface preparation 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 cost of sales related to our complex Advanced segment systems which require specific custom configuration and advanced features, including robotics, to match unique customer applications as well as parts and services to sustain these installed systems.

Financial information about our segments is included in Note 17 - Business Segments and Geographic Information of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

Sales Outside the United States

In fiscal year 2011, 57%, or $123.0 million, of our total consolidated sales were to customers outside the United States, this included:


•	$25.5 million of exports from the United States;


•	$42.9 million of sales from European locations; and


•	$54.6 million of sales from our other foreign locations

Raw Materials

We depend on the availability of raw materials, parts and subassemblies from our suppliers and subcontractors. Principal materials used to make waterjet products are metals, and plastics, typically in sheets, bar stock, castings, forgings and tubing. We also purchase many electrical and electronic components, fabricated metal parts, high-pressure fluid hoses, ball screws, seals and other items integral to our products. Suppliers are competitively selected based on quality, delivery and cost. Our suppliers' ability to provide timely and quality raw materials, components, kits and subassemblies affect our production schedules and contract profitability. Some of our business units purchase these items from sole or limited source suppliers; however, we are currently able to source our raw materials in quantities sufficient to meet our requirements in each business unit, some of which may require longer lead times due to availability.

Our strategic sourcing and new product development initiatives seek to find ways of mitigating the inflationary pressures of the marketplace, including renegotiating with our suppliers and customers to avoid a significant impact to our margins and product enhancements and to leverage quality and cost benefit. Macro-economic pressures may increase our operating costs with consequential risk to our cash flow and profitability. We currently do not employ forward contracts or other financial instruments to hedge commodity price risk, although we continuously explore supply chain risk mitigation strategies.

Intellectual Property

We have a number of patents related to our processes and products both domestically and internationally. While in the aggregate our patents are of material importance to our business, we believe that no single patent or group of patents is of material importance to our business as a whole. We also rely on non-patented proprietary trade secrets and knowledge, confidentiality agreements, creative product development and continuing technological advancement to maintain a technological lead on our competitors.

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Product Development

We strive to improve our competitive position in all of our segments by continuously investing in research and development to drive innovation in our products and manufacturing technologies. Our research and development investments support the introduction of new products and enhancements to existing products.

We believe research and development is critical to the success of our business strategy. During the fiscal year ended April 30, 2011, we expensed $10.1 million related to product research and development as compared to $8.1 million in fiscal year 2010 and $8.6 million in fiscal year 2009. Research and development expenses as a percentage of revenue were between 3% and 5% during each of the respective fiscal years ended April 30, 2011, 2010, and 2009. We expect to continue investing in research and development activities in order to create innovative next-generation products and maintain competitive advantages in the markets we serve.

Backlog

Our backlog decreased 2% from $47.3 million at April 30, 2010 to $46.5 million at April 30, 2011. The backlog at April 30, 2011 and 2010 represented 21% and 27% of our trailing twelve months sales as of April 30, 2011 and 2010, respectively.

Backlog includes firm orders for which written authorizations have been accepted and revenue has not yet been recognized. Generally, our products, exclusive of our Advanced segment systems, can be shipped within a four to 16 week period. Advanced segment systems typically have long lead times which may range from 12 to 24 months. The unit sales price for most of our products and services is relatively high (typically ranging from tens of thousands to millions of dollars) and individual orders can involve the delivery of several hundred thousand dollars of products or services at one time. Due to possible customer changes in delivery schedules and cancellation of orders, our backlog at any particular date is not indicative of actual sales for any succeeding period. Delays in delivery schedules and/or a reduction of backlog during any particular period could have a material adverse effect on our business and results of operations.

Working Capital Practices

There are no special or unusual practices relating to our working capital items. We generally require advance payments as deposits on customized equipment and standard systems and also require progress payments for customized equipment during the manufacturing of these products or prior to product shipment.

Employees

We had 616 full time employees as of April 30, 2011 compared to 594 and 649 for the respective fiscal years ended April 30, 2010 and 2009, with 65% located in the United States and 35% located in other foreign locations. Our success depends in part on our ability to attract and retain employees.

Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission (“SEC”). Copies of these reports, proxy statements and other information can be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and can also be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's Web site at www.sec.gov.

We make available, free of charge on our Web site, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our Web site at www.FlowWaterjet.com - select the “Investors” link and then the “Reports” link.

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Item 1A. Risk Factors

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations, and the trading price of our common stock.

You should consider the following risk factors, in addition to the other information presented in this report and the matters described in our “Forward-Looking Statements” section, as well as other reports and registration statements we file from time to time with the SEC, in evaluating us, our business, and an investment in our securities.

Risks Related to our Business

Our results of operations and financial condition could be materially affected by changes in product mix or pricing.

Our overall profitability may not meet expectations if our products, customers or geographic mix or changes in customer requirements or specifications, in particular as it relates to our long-term contracts, are substantially different than anticipated or initially planned. Our profit margins vary among products, customers and geographic markets. Consequently, if our mix of any of these is substantially different from what is anticipated or planned in any particular period, our operating results may be negatively affected and our profitability lower than anticipated.

Failure to effectively manage our indirect sales channel and indirect technical service providers could adversely affect our results of operations and financial condition.

In order to increase sales and capture a leading market share globally, we have focused on expanding our indirect sales channel, through distributors and sales agents, to augment our existing direct sales force. Additionally, we have engaged indirect technical service partners to augment our staff with installations and service calls as a result of the increase in demand for our products. Our success in integrating the indirect sales channel and indirect technical service providers into our business will be impacted by our ability to train and manage new and existing relationships with distributors, sales agents and service providers. If we are not able to effectively train and manage these indirect channels, we may not be able to achieve our operating results and this could have a negative effect on our operating results and financial condition.

Rising commodity and fuel prices may adversely affect our results of operations and financial condition.

We are a large buyer of steel, as well as other commodities required for the manufacture of our products. As a result, changes in commodity and fuel prices may have an adverse effect on our results of operations and financial condition through increased inventory and shipping costs by suppliers. Historically, we have been able to pass on increases in commodity and shipping prices to our customers; however, our success in doing so in future periods cannot be assured.

Foreign currency exchange rates may adversely affect our results of operations and financial condition.

We have substantial assets, liabilities, revenues and expenses denominated in currencies other than the U.S. dollar, and to prepare our consolidated financial statements, we must translate these items into U.S. dollars at the applicable exchange rates. We are therefore exposed to movements in foreign exchange rates against the U.S. Dollar. Of these, the most significant is currently the Euro. Substantially all of our sales to our customers and operating costs in Europe are denominated in Euro creating an exposure to foreign currency exchange rates. Additionally, certain of our foreign subsidiaries make sales denominated in U.S. Dollars which expose them to foreign currency transaction gains and losses.

If we fail to obtain sufficient quantities of materials and components required for our manufacturing activities at competitive prices and quality and on a timely basis or fail to effectively adapt our cost structure to changing market conditions, our business and financial results will suffer.

We purchase materials and components from third parties for use in our manufacturing operations. Some of our business units purchase these items from sole or limited source suppliers. If we cannot obtain sufficient quantities of materials and components at competitive prices and quality and on a timely basis, we may not be able to produce sufficient quantities of product to satisfy market demand, product shipments may be delayed or our material or manufacturing costs may increase. In addition, because we cannot always immediately adapt our cost structures to changing market conditions, our manufacturing capacity may at times exceed our production requirements or fall short of our production requirements. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our business and financial results.

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The recent economic recession and its impact on the credit markets could adversely affect our results of operations.

While the macroeconomic environment has improved, it is impossible to predict the speed of a recovery and future potential growth. Future deterioration or volatile market conditions could:


•	have an adverse effect on our customers and suppliers and their ability to purchase our products;


•	reduce our ability to take advantage of growth and expansion opportunities;


•	adversely affect our ability to access credit markets or raise capital on terms acceptable to us;


•	limit our capital expenditures for repair or replacement of existing facilities or equipment; and


•	adversely affect our ability to be in compliance with covenants under existing credit agreements.

All of which could adversely affect our results of operations and financial position.

We have unresolved claims with the purchaser of Avure.

During fiscal year 2009, we were notified by the purchaser of our Avure Business (“Purchaser”), which we reported as a discontinued operation for the year ended April 30, 2006, that the Swedish tax authority was conducting an audit which includes periods during the time that we owned the subsidiary. Pursuant to our agreement with the Purchaser, we had made commitments to indemnify various liabilities and claims, including any tax matters when we owned the business. The Swedish tax authority concluded its audit and issued its report in November 2009, initially asserting that Avure owes 19.5 million Swedish Krona in additional taxes, penalties and fines. In April 2010, we filed an appeal to contest the findings by the Swedish Tax Authority. Since the filing of our appeal, we have had on-going dialogue with the Swedish tax authorities throughout the year and will continue to contest the findings. We recorded a charge in the first quarter of fiscal year 2010 related to the periods during which we owned Avure and, as of April 30, 2011, the liability is approximately $1.4 million. The balance of the accrued liability will fluctuate period over period with changes in foreign currency rates until such time as the matter is ultimately resolved.

If we fail to technologically advance our products and successfully introduce new products, our future growth and financial results may be adversely affected.

Our ability to develop new products may affect our competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products or failure to gain market acceptance of new products and technologies may reduce future revenues and adversely affect our competitive position and our financial results.

We might fail to adequately protect our intellectual property rights or third parties might assert that our technologies infringe on their intellectual property.

Protecting our intellectual property is critical to our innovation efforts. We rely on a combination of patents, trade secrets, and trademarks to protect our intellectual property, but this protection might be inadequate. For example, our pending or future patent applications might not be approved or, if allowed, they might not be of sufficient strength or scope. Conversely, third parties, certain of whom have filed lawsuits against us in the past, might assert that our technologies infringe their proprietary rights. Any future related litigation to defend our intellectual property and/or defend ourselves from assertions of infringement could result in substantial costs and diversion of our efforts and could adversely affect our business, whether or not we are ultimately successful.

Changes in our income tax rates or exposure to additional income tax liabilities could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.

We are subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate can be affected by changes in the mix of earnings in countries with differing statutory tax rates, accruals related to unrecognized tax benefits, the results of audits and examinations of previously filed tax returns and changes in tax laws. Any of these factors may adversely affect our tax rate and decrease our profitability. The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from our unrecognized tax benefits, our future results may include unfavorable adjustments to our tax liabilities.

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Unexpected losses in future reporting periods may require the Company to adjust the valuation allowance against its deferred tax assets.

We evaluate our deferred tax assets for realizability based on all available evidence. This process involves significant assumptions that are subject to change from period to period based on changes in tax laws or variances between the future projected operating performance and our actual results. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period. Future adjustments, either increases or decreases, to the deferred tax asset valuation allowance will be determined based upon changes in the expected realization of the net deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carry back or carry forward periods under the tax law. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we may be required to record adjustments to the valuation allowance in future reporting periods. Such a charge could have a material adverse effect on our results of operations and financial condition. As of April 30, 2011, we had $21.7 million of net deferred tax assets.

Any significant disruption in our information technology systems or those of third-parties that we utilize in our operations could adversely impact our business.

We utilize our own communications and computer hardware systems located either in our facilities or in that of a third-party web hosting provider. In addition, we utilize third-party Internet-based or “cloud” computing services in connection with our business operations. Our servers and those of third-parties we use in our operations are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions and delays in our operations as well as loss, misuse, or theft of data.

If we are unable to complete the upgrades to our information technology systems that are currently in process, or our upgrades are unsuccessfully implemented, our future success may be negatively impacted.

In order to maintain our leadership position in the market and efficiently process increased business volume, we are making a significant multi-year upgrade to our computer hardware, software and our Enterprise Resource Planning (“ERP”) system. Should we be unable to continue to fund the completion of this upgrade in all our locations, or should the ERP system upgrade be unsuccessful or take longer to implement than anticipated, our ability to grow the business and our financial results could be adversely impacted.

If we are unable to hire, retain and motivate highly qualified employees, including our key employees, we may not be able to successfully manage our business.

Our success depends on our ability to identify, attract, hire, retain and motivate highly skilled technical, managerial, sales and marketing, and corporate personnel. If we fail to successfully hire and retain a sufficient number of highly qualified employees, we may have difficulties in supporting our customers or expanding our business. The realignment of resources, reductions in workforce, and/or other operational decisions could create an unstable work environment that may have a negative effect on our ability to hire, retain, and motivate employees.

Our business and operations are substantially dependent on the performance of our key employees, all of whom are employed on an at-will basis. While none of our key personnel is irreplaceable, the loss of the services of any of these individuals may be disruptive to our business. There can be no assurance that any retention program we initiate will be successful at retaining employees, including key employees.

Our global presence subjects us to risk that may adversely affect our profitability, cash flow, and financial condition.

In fiscal year 2011, approximately 57% of our sales were derived outside the U.S. Since our growth strategy depends in part on our ability to further penetrate markets outside the U.S., we expect to continue to increase our sales outside the U.S., particularly in emerging markets. In addition, some of our sales distribution offices and many of our suppliers are located outside the U.S. Our international business is subject to risks that are customarily encountered in non-U.S. operations, including:


•	interruption in the transportation of materials to us and finished goods to our customers;

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•	changes in a specific country's or region's polititcal or economic conditions;


•	trade protection measures;


•	import or export licensing requirements;


•	unexpected changes in laws or licensing and regulatory requirements, including negative consequences from changes in tax laws;


•	limitations on ownership and on repatriation of earnings;


•	difficulty in staffing and managing widespread operations;


•	differing employment practices and labor issues;


•	differing protection of intellectual property; and


•	natural disasters, security concerns, including crime, political instability, terrorist activities and the U.S. and international response thereto.

Any of these risks could negatively affect our results of operations, cash flows, financial condition, and overall growth.

We may not be able to comply with the financial tests or ratios required in order to comply with covenant requirements under our Credit Facility which may impact our ability to draw funds and may result in the acceleration of the maturity of, and/or the termination of the Credit Facility.

Our Credit Facility agreement requires us to comply with or maintain certain financial tests and ratios and restrict our ability to:


•	draw down on our existing line of credit or incur more debt;


•	make certain investments and payments;


•	fund additional letters of credit;


•	pay cash dividends; and


•	transfer or sell assets.

Our ability to comply with these covenants is subject to various risks and uncertainties. In addition, events beyond our control could affect our ability to comply with and maintain the financial tests and ratios required by this indebtedness. Any failure by us to comply with and maintain all applicable financial tests and ratios and to comply with all applicable covenants could result in an event of default with respect to a substantial portion of our debt which would result in the acceleration of the maturity and/or the termination of our credit facility. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business in our sole discretion could harm our business.

We may need to raise funds to finance our future capital and/or operating needs.

We may need to raise funds through public or private debt or sale of equity to achieve our current business strategy in future periods. The financing we need may not be available when needed. Even if this financing is available, it may be on terms that we deem unfavorable or are materially adverse to our shareholders' interests, and may involve substantial dilution to our shareholders. Our inability to obtain financing will inhibit our ability to implement our development strategy, and as a result, could require us to diminish or suspend our development strategy and possibly cease certain of our operations. If we require additional funds and are unable to obtain additional financing on reasonable terms, we could be forced to delay, scale back or eliminate certain product development programs and/or our capital projects. In addition, such inability to obtain additional financing on reasonable terms could have a negative effect on our business, operating results, or financial condition to such extent that we are forced to restructure, sell assets or cease operations, any of which could put our shareholders' investment dollars at significant risk.

We may incur net losses in the future, and we may not be able to sustain profitability on a quarterly or annual basis.

We may incur net losses in the future including losses from our operations, the impairment of long-lived assets and restructuring charges. There can be no assurance that we will be able to conduct our business profitably in the future.

Our stock price has been and is likely to continue to be highly volatile.

The trading price of our common stock has been highly volatile. On June 14, 2011, the closing price of our common stock was $3.73. Our stock price could decline or be subject to wide fluctuations in response to factors such as the risks discussed in this section and the following:


•	actual or anticipated fluctuations in our operating results or our competitors' operating results;

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•	announcements by us or our competitors of new products;


•	capacity changes, significant contracts or changes to existing contracts, acquisitions, or strategic investments;


•	our growth rate and our competitors' growth rates;


•	changes in stock market analyst recommendations regarding us, our competitors, or our industry in general, or lack of analyst coverage of our common stock;


•	sales of our common stock by our executive officers, directors, and significant stockholders or sales of substantial amounts of common stock at one time; and


•	changes in accounting principles.

In addition, there has been significant volatility in the market price and trading volume of our securities that is sometimes unrelated to our operating performance. Some companies that have had volatile market prices for their securities have been the target of a hostile takeover or subject to involvement by activist shareholders. If we are the target of such a situation, it could result in substantial costs and would divert management's attention and resources.

Our operations may be impaired as a result of disasters, business interruptions or similar events.

Disasters and business interruptions such as earthquakes, flooding, fire, and electrical failure affecting our operating activities and major facilities could materially and adversely affect our operations, our operating results and financial condition. In particular, our facility in Kent, Washington, which is our headquarters and the primary manufacturing facility for our ultra-high pressure pumps, is in close proximity to the Green River which currently has an increased risk of flooding over the next 3 to 5 years because of the structural integrity of a dam on the river. If such flooding occurs, it could be extremely disruptive to our business and could materially and adversely affect our operations, operating results and financial condition. We have developed a disaster recovery plan to mitigate the negative results of such an occurrence, however, the implementation and execution of such plans may not be adequate.

Risks Related to the Industries in Which We Operate

The markets we serve are highly competitive and some of our competitors may have resources superior to ours. The result of this competition could reduce our sales and operating margins.

We face competition in a number of our served markets as a result of the entry of new competitors and alternative technologies such as lasers, saws, plasma, shears, routers, drills and abrasive blasting techniques. Some of our competitors or potential competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures or more established relationships in the industry than we have. Our competitors may be able to adopt more aggressive pricing policies, develop and expand their product offerings more rapidly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their products than we do. Our failure to compete effectively may reduce our revenues, profitability and cash flow, and pricing pressures may adversely impact our profitability.

Cyclical economic conditions may adversely affect our financial condition and results of operations or our growth rate could decline if the markets into which we sell our products decline or do not grow as anticipated.

Our products are sold in industries and end-user applications that have historically experienced periodic downturns, such as automotive, aerospace, paper, job shops and stone and tile. Cyclical weaknesses in the industries that we serve have led and could lead to a reduced demand for our products and adversely affect our financial condition and results of operations. Any competitive pricing pressures, slowdown in capital investments or other downturn in these industries could adversely affect our financial condition and results of operations in any given period. Additionally, visibility into our markets is limited. Our quarterly sales and operating results depend substantially on the volume and timing of orders received during the quarter, which are difficult to forecast. Any decline in our customers' markets would likely result in diminished demand for our products and services and would adversely affect our growth rate and profitability.

Item 1B. Unresolved Staff Comments

There are no unresolved comments that were received from the SEC staff relating to our periodic or current reports under the Securities Exchange Act of 1934 as of April 30, 2011.

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Item 2. Properties

We occupied approximately 346 thousand square feet of floor space on April 30, 2011 for manufacturing, warehousing, engineering, sales offices, and administration, of which approximately 61% was located in the United States.

The following table provides a summary of the floor space by segment:



	Owned	Leased
	(In square feet)
Standard	15,820	267,653
Advanced	40,245	22,180
Total	56,065	289,833

We have operations at the following locations:

•

Standard - Kent, Washington, which is our headquarters and the primary ultrahigh-pressure pump and component manufacturing facility; Jeffersonville, Indiana, a manufacturing facility for our Standard systems; Nagoya, Japan; Shanghai, Guangzhou and Beijing, China; Hsinchu, Taiwan; Bretten, Germany; Birmingham, England; Milan, Italy; Madrid, Spain; Lyon, France; Brno, Czech Republic; Dubai, UAE; Bangalore, India; Sao Paulo, Brazil; and Buenos Aires, Argentina;


•	Advanced - Jeffersonville, Indiana, the primary manufacturing facility for our Advanced systems.

We believe that our principal properties are adequate for our present needs and, supplemented by planned improvements, expect them to remain adequate for the foreseeable future.

Item 3. Legal Proceedings

Refer to Note 8 - Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data for a summary of legal proceedings.

Item 4. (Removed and Reserved)

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our stock is traded on the NASDAQ Stock Market under the symbol “FLOW”. The range of high and low sales prices for our common stock for the last two fiscal years is set forth in the following table.



	Fiscal Year 2011		Fiscal Year 2010
	Low	High	Low	High
First Quarter	2.16	3.25	1.70	2.87
Second Quarter	2.03	2.94	1.96	2.91
Third Quarter	2.64	4.33	2.32	4.08
Fourth Quarter	3.75	4.72	2.74	4.00

Holders of the Company's Common Stock

As of June 14, 2011, there were approximately 950 holders of record of our common stock.

Dividends

We have not paid dividends to common shareholders in the past. Our Board of Directors intends to retain future earnings,

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if any, to finance development and expansion of our business and reduce debt and does not expect to declare dividends to common shareholders in the near future. Our ability to pay cash dividends is restricted under our Credit Facility Agreement. Refer to Note 7 - Notes Payable to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, for further discussion on this credit facility.

Issuer Purchases of Equity Securities

None.

Comparison of Five-Year Cumulative Total Shareholder Return*

The following graph compares the cumulative 5-year total return of holders of our common stock with the cumulative total returns of the S&P Smallcap 600 index, the NASDAQ Composite index, and the Dow Jones U.S. Industrial Machinery index.



	4/06	4/07	4/08	4/09	4/10	4/11
Flow International Corporation	100.00	86.09	74.19	13.46	23.37	31.88
S&P Smallcap 600	100.00	107.65	97.91	68.49	101.22	122.90
NASDAQ Composite	100.00	111.24	107.01	75.98	109.83	129.57
Dow Jones US Industrial Machinery	100.00	104.23	117.98	70.25	114.64	151.77




*		The stock price performance included in this graph is not necessarily indicative of future stock price performance.

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Performance Graph Assumptions


•	Assumes a $100.00 investment in our common stock and in each index in April 30, 2006 and tracks it through to April 30, 2011.


•	Total return assumes all dividends are reinvested.


•	Measurement dates are the last trading day of the fiscal year shown.

Recent Sales of Unregistered Securities

None.

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements, the related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in this Annual Report on Form 10-K.



	Fiscal Year Ended April 30,
	2011		2010			2009			2008		2007(i)
	(In thousands, except per share data)
Statement of Operations Data:
Sales	$	216,524	$	173,749		$	210,103		$	244,259	$	213,435
Income (Loss) From Continuing Operations	1,008		(7,389		)	(23,086		)	21,911		4,022
Net Income (Loss)	766		(8,484		)	(23,819		)	22,354		3,755

Basic Income (Loss) Per Share:
Income (Loss) From Continuing Operations	0.02		(0.17		)	(0.61		)	0.59		0.11
Net Income (Loss)	0.02		(0.19		)	(0.63		)	0.60		0.10

Diluted Income (Loss) Per Share:
Income (Loss) From Continuing Operations	0.02		(0.17		)	(0.61		)	0.58		0.11
Net Income (Loss)	0.02		(0.19		)	(0.63		)	0.59		0.10



	Fiscal Year Ended April 30,
	2011		2010		2009		2008		2007
	(In thousands)
Balance Sheet Data:
Working Capital	$	41,131	$	31,913	$	27,923	$	56,126	$	43,108
Total Assets	153,063		131,209		144,960		151,155		123,172
Short-Term Debt	5,525		411		16,593		2,095		7,188
Long-Term Obligations, net(ii)	8,762		7,972		1,937		2,333		2,779
Shareholders' Equity	79,454		75,624		62,711		86,064		61,224


i.	Our consolidated statements of operations for fiscal year 2007 have been recast to reflect the results of operations of our CIS Technical Solutions division as discontinued operations

ii.

Long-Term Obligations for the respective fiscal years ended April 30, 2011 and 2010 include $8.7 million and $8.0 million related to subordinated notes issued to OMAX pursuant to the terms of the amended Merger Agreement and the Settlement and Cross Licensing Agreement which is discussed in Note 18 - Provision for Patent Litigation and Termination of OMAX Merger Agreement to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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In this discussion and analysis, we discuss and explain our financial condition and results of operations, including:


•	Factors which might affect the comparability of our results;


•	Our earnings and costs in the periods presented;


•	Changes in earnings and costs between periods;


•	Impact of these factors on our overall financial condition;


•	Expected future expenditures for capital projects; and


•	Expected sources of cash for future operations and capital expenditures.

As you read this discussion and analysis, refer to our Consolidated Statements of Operations included in Item 8 - Financial Statements and Supplementary Data, which presents the results of our operations for the respective fiscal years ended April 30, 2011, 2010 and 2009. We analyze and explain the differences between the periods in the specific line items of our Consolidated Statements of Operations. This discussion and analysis has been organized as follows:


•	Executive Summary, including overview, business strategy and future outlook;


•	Significant matters affecting comparability that are important to understanding the results of our operations and financial condition;


•	Results of operations beginning with an overview of our results, followed by a detailed review of those results by reporting segment;


•	Financial condition addressing liquidity position, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and


•	Critical accounting policies which require management's most difficult, subjective or complex judgment.

Certain other statements in Management's Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. 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 - Risk Factors.

Executive Summary

Overview and Outlook

Fiscal 2011 Highlights

During fiscal year 2011, our consistent, positive quarterly execution in our Standard segment enabled us to return to profitability by the end of the fiscal year with strong sales performance in each quarter combined with relatively higher gross profit margins over the prior fiscal year in our Standard segment and controlled operating expenses. The overall improvement in our Standard business was partially offset by the impact of adjustments to the cost estimates related to specific projects in our Advanced segment that are nearing completion.

On an annual basis:


•	We achieved a record for annual sales from our global spare parts business at $70.4 million, a 22% growth over the prior year;


•	At $117.7 million, our Standard segment systems sales in fiscal year 2011 grew 44% over fiscal year 2010;


•	Consistent with our expectations, our Advanced segment systems sales were $28.4 million which was 17% lower than fiscal year 2010 primarily due to the timing of revenue recognition for some of our significant aerospace contracts;


•	Our overall gross profit margin was consistent at 39%, with our Standard segment gross margin returning back to normalized levels of 42%, which was partially offset by negative adjustments in original cost estimates on certain Advanced segment contracts as more experience was gained and new information obtained regarding installation constraints and customer expectations;

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•	Our operating income was $4.9 million or 2% of sales compared with an operating loss of $7 million in the prior fiscal year;


•	We generated net income of $0.02 per share, marking our return to profitability since the start of the recession;


•	Our consolidated adjusted earnings before interest, tax and depreciation (“EBITDA”) was $13.7 million for fiscal year 2011, an increase of approximately $8 million over the prior year. Refer to reconciliation of Consolidated Adjusted EBITDA to Net Income set forth below.

Our improved performance during the fiscal year afforded us the opportunity to successfully amend and renew our existing credit facility for a three-year period to expire March 2, 2014, strengthening our financial position at more favorable terms to us, both in terms of the financial covenants that we need to maintain as well as lower interest rates.

Looking Ahead

We believe that we are well positioned to continue growing our business organically over the long-term by enhancing our product offerings and expanding our customer base through our global channels of distribution. We expect near-term demand to be driven by capital investment needs with modest to moderate growth in both orders and sales. We will continue to focus strongly on working capital management and cash flow generation. In addition, while we intend to continue investing in our business, it will be limited to a few specific strategic initiatives with cost control remaining a high priority to ensure sustainable profitability while maintaining our competitiveness in the markets we serve.

Reconciliation of Consolidated Adjusted EBITDA to Net Income (Loss):



	Fiscal Year Ended April 30,
	2011		2010			2009
Net Income (Loss)	$	766	$	(8,484	)	$	(23,819	)
Add Back:
Depreciation and Amortization	6,302		5,725			4,343
Income Tax Provision (Benefit)	2,895		(2,844		)	(8,230		)
Interest Charges	1,776		2,374			1,562
Non-Cash Charges	1,758		3,380			7,273
Other (i)	242		5,724			35,736
Consolidated Adjusted EBITDA	$	13,739	$	5,875		$	16,865



(i) Allowable Add backs Pursuant to Credit Facility Agreement

We define Consolidated Adjusted EBITDA as net income (loss), determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), excluding the effects of income taxes, depreciation, amortization of intangible assets, interest expense, other non-cash charges, which includes such items as stock-based compensation expense, foreign currency gains or losses, and other non-cash allowable add backs pursuant to our Credit Facility Agreement.

Consolidated Adjusted EBITDA is a non-GAAP financial measure and the presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The items excluded from this non-GAAP financial measure are significant components of our financial statements and must be considered in performing a comprehensive analysis of our overall financial results. We use this measure, together with our GAAP financial metrics, to assess our financial performance, allocate resources, evaluate our overall progress towards meeting our long-term financial objectives, and assess compliance with our debt covenants. We believe that this non-GAAP financial measure is useful to investors and analysts in allowing for greater transparency with respect to the supplemental information used by us in our financial and operational decision making. Our calculation of Consolidated Adjusted EBITDA may not be consistent with calculations of similar measures used by other companies.

Matters Affecting Comparability

Our financial performance over the past few years has been driven by many factors, principally the general economic conditions within our global markets, fluctuations in the relationship of foreign currencies to the U.S. dollar, the availability of capital, product and project mix and the impact of restructuring initiatives. These key factors have impacted the comparability of our results of operations in the past and are likely to affect them in the future.

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General Economic Conditions in our Global Markets

Our products and services are available worldwide. Demand for our products depends on the level of new capital investment and planned maintenance by our customers. The level of capital expenditures depends, in turn, on the general economic conditions within that market as well as access to capital at reasonable cost. The impact of the global economic downturn, which started in our third quarter of fiscal 2009 and continued into our fiscal year 2011, varied in each of the geographic markets that we serve. Our financial performance will continue to be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global channels of distribution, manufacturing capabilities, the expansion of market opportunities, and successfully engineering innovative new product applications for end users in a variety of geographic markets. However, we believe that our geographic end markets and product diversification has and will continue to minimize the impact that any one country or economy has on our consolidated results.

Foreign Currency Fluctuations

Most of our sales in non-U.S. markets are made by subsidiaries located outside the United States. For the year ended April 30, 2011, approximately 57% of our total consolidated sales were to customers outside the United States with the majority of that being denominated in currencies other than the U.S. dollar. Consequently, currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts. During the first half of fiscal 2011, the U.S. dollar strengthened significantly against these currencies versus the comparable prior year period, negatively impacting the translation of our international revenues and earnings during that period. However, during the second half of fiscal 2011, the average exchange rates for these currencies began to improve but remained weaker than the year-ago period.

In addition, some of our transactions that occur in our international locations are denominated in U.S. dollars, exposing them to exchange rate fluctuations when converted to their local currencies. These transactions include U.S. dollar denominated purchases of inventory and intercompany liabilities. Fluctuations in exchange rates can impact the profitability of our foreign operations and reported earnings and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates.

Product and Project Mix

Our profit margins vary in relation to the relative mix of many factors, including the segments that we serve, the type of product we sell, the geographic location in which the product is sold, the end market for which the product is designed, and the relative percentage of total revenue represented by our Standard systems, Advanced systems, aftermarket sales and services.

Launch of new Enterprise Resource Planning (“ERP”) System

We placed a new ERP system with a carrying value of $10.6 million into service at the end of the second quarter in fiscal year 2010 when it was launched in the first of our geographic locations. This ERP system is being depreciated over a useful life of five years since its launch. Full-year and partial-year depreciation expense related to this asset in the respective years ended April 30, 2011 and 2010, will impact year-over-year operating expense comparisons.

Reinstatement of Previously Reduced Wages and Suspended Employee Benefits

We responded to the global economic downturn in fiscal year 2009 by implementing permanent and temporary changes to adjust our operating costs. Some of these changes included a temporary reduction in wages or hours worked by a majority of our employees and suspension of certain employee benefits. While these temporary wage reductions and benefit suspensions helped us weather the economic downturn, they did not fit into our long-term strategy of attracting and retaining skilled and knowledgeable employees. As we started to see improvement in our overall business and the economy in general, we reinstated these wages and employee benefits using a phased in approach starting in the third quarter of fiscal year 2010 and completed full reinstatement by the end of the third quarter of fiscal year 2011. Furthermore, in the latter part of fiscal year 2011, we started to make strategic investments in our business, including our employees. These reductions in operating costs, subsequent reinstatement of some of these costs and investments in our business impact year-over-year comparability of our operating expenses.

Restructuring and Other Operating Charges

Certain of the initiatives discussed above, were to improve our cost structure, better utilize overall capacity and improve

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general operating efficiencies. These changes were permanent in nature and constituted restructuring activities. During the respective years ended April 30, 2010 and 2009, we recorded net charges of $1.0 million and $3.1 million related to these restructuring activities.

Further in fiscal year 2009, we expensed $3.8 million of previously deferred direct transaction costs which had been capitalized as part of the contemplated acquisition cost of OMAX.

Provision for Patent Litigation and Termination of OMAX Merger Agreement

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

(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. We 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 a 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 we were 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 our option; 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 we were to issue a promissory note in the principal amount of $4 million to OMAX.

We 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 fiscal year 2010, we terminated our 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. We recorded a $6 million charge pursuant to the provisions of the amended Merger Agreement in the first quarter of fiscal year 2010, net of a $2.8 million discount as the two subordinated notes issued to OMAX were at a stated interest rate of 2%, which is below our incremental borrowing rate. This discount is being amortized as interest expense through the maturity of the subordinated notes in August 2013.

Goodwill Impairment Charges

Our results in fiscal year 2009 included a non-cash goodwill impairment charge of $2.8 million, which represented the carrying value of all of our goodwill at the time of impairment. This charge was recognized due to a combination of factors, including the current economic environment which had resulted in a significant decline in the results of our operations and the sustained period of decline in our market capitalization.

Discontinued Operations

In fiscal year 2009, we were notified by the purchaser of our Avure Business (“Purchaser”), which was reported as a discontinued operation for the year ended April 30, 2006, that the Swedish Tax Authority was conducting an audit which included periods during the time that we owned the subsidiary. Pursuant to an agreement with the Purchaser, we had made commitments to indemnify various liabilities and claims, including any tax matters when it owned the business. The Swedish tax authority concluded its audit and issued a final report in November 2009 initially asserting that Avure owes 19.5 million Swedish Krona in additional taxes, penalties and fines. In April 2010, we filed an appeal to contest the findings by the Swedish Tax Authority. Since the filing of our appeal, we have had on-going dialogue with the Swedish tax authorities throughout the

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year and we will continue to contest the findings. We recorded a charge in fiscal year 2010 related to the periods during which we owned Avure, which 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 our Consolidated Statement of Operations. As of April 30, 2011, we have an accrued liability of approximately $1.4 million related to the Avure matter. The balance of the accrued liability will fluctuate period over period with changes in foreign currency rates until such time as the matter is ultimately resolved.

In fiscal year 2009, we shut down our CIS division, which provided technical services to improve the productivity of automated assembly lines and would have been reported as part of our Advanced segment. Accordingly, we recast all periods presented to reflect this division's results as discontinued operations.

Results of Operations

Consolidated



										2011 vs 2010					2010 vs 2009
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2011			2010			2009			$			%		$			%
	(In thousands)
Sales	$	216,524		$	173,749		$	210,103		$	42,775		25	%	$	(36,354	)	(17	)%
Gross Margin	84,461			67,767			88,328			16,694			25	%	(20,561		)	(23	)%
Selling, General, and Administrative Expenses	79,574			70,545			79,320			9,029			13	%	(8,775		)	(11	)%
Provision for Patent Litigation	—			—			29,000			—			NM		(29,000		)	NM
Goodwill Impairment	—			—			2,764			—			NM		(2,764		)	NM
Restructuring and Other Operating Charges, net	—			4,222			6,878			(4,222		)	(100	)%	(2,656		)	(39	)%
Operating Income (Loss)	4,887			(7,000		)	(29,634		)	11,887			170	%	22,634			76	%

Expressed as a % of Sales:
Gross Margin	39		%	39		%	42		%				—					(300) bpts
Selling, General, and Administrative Expenses	37		%	41		%	38		%				(400) bpts					300 bpts
Provision for Patent Litigation	—		%	—		%	14		%				NM					NM
Goodwill Impairment	—		%	—		%	1		%				NM					NM
Restructuring and Other Operating Charges, net	—		%	2		%	3		%				NM					NM
Operating Income (Loss)	2		%	(4		)%	(14		)%				NM					NM

bpts = basis points
NM = not meaningful
										2011 vs 2010					2010 vs 2009
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2011			2010			2009			$			%		$			%
	(In thousands)
System Sales	$	146,152		$	116,132		$	145,944		$	30,020		26	%	$	(29,812	)	(20	)%
Consumable Parts Sales	70,372			57,617			64,159			12,755			22	%	(6,542		)	(10	)%
	$	216,524		$	173,749		$	210,103		$	42,775		25	%	$	(36,354	)	(17	)%

Segment Results of Operations

We report our operating results to our Chief Executive Officer, who is our chief operating decision maker, based on market segments which is consistent with management's long-term growth strategy. Our reportable segments are Standard and

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Advanced. The Standard segment includes sales and cost of sales related to our cutting surface preparation 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 cost of sales related to our complex aerospace and automation systems which require specific custom configuration and advanced features, including robotics, to match unique customer applications as well as parts and services to sustain these installed systems.

Segment results in fiscal year 2011 and 2010 were measured based on revenue growth and gross margin. Previously, segment operating results were measured based on revenue growth, gross margin and operating income (loss). We have revised prior period comparable segment presentation to reflect this change in measurement of segment results by our chief operating decision maker.

This section provides a comparison of net sales and gross margin for each of our reportable segments for the last three fiscal years. For further discussion on our reportable segments, refer to Note 17 - Business Segments and Geographic Information of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

Standard Segment



										2011 vs 2010				2010 vs 2009
	Fiscal Year Ended April 30,									Increase (Decrease)				Increase (Decrease)
	2011			2010			2009			$		%		$			%
	(In thousands)
Sales	$	187,887		$	137,514		$	181,132		$	50,373	37	%	$	(43,618	)	(24	)%
% of total company sales	87		%	79		%	86		%			NM					NM
Gross Margin	78,321			56,097			79,869			22,224		40	%	(23,772		)	(30	)%
Gross Margin as % of sales	42		%	41		%	44		%			100 bpts					(300) bpts

bpts = basis points
NM = not meaningful

Fiscal year 2011 compared to fiscal year 2010

Sales in our Standard segment increased $50.4 million or 37% over the prior year. This increase was driven by significant improvements in system sales volume across all geographies as the global economic environment improved and businesses increased capital spending. The most notable improvements were in North America and Europe, as business spending in these two regions increased to support growing economic activity. The North American and European regions had a combined increase in system sales of $24.2 million, or 40% in fiscal year 2011 when compared to the prior year. Consumable parts revenue for the Standard segment also increased by $14.5 million or 26% in fiscal year 2011 on higher system sales volume and improved system utilization by our customers with all geographies reporting double digit growth over the prior fiscal year. North America and Europe also led the increase in consumable spare parts revenue for a combined increase of $7.8 million or 19% when compared to the prior year. Excluding the impact of foreign currency changes, sales in Standard segment increased $50.3 million or 37% in fiscal year 2011 compared to the prior year.

Gross margin in fiscal year 2011 was $78.3 million or 42% of sales compared to $56.1 million or 41% of sales in the prior year. The improvement in our margins over the prior year was primarily attributable to product mix. Generally, comparisons of gross margin rates in this segment will vary period over period based on changes in our product sales mix and prices and levels of production volume.

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Fiscal year 2010 compared to fiscal year 2009

Sales in our Standard segment decreased $43.6 million or 24% over the prior year. This decline was primarily due to significant standard system sales volume decline in North America and Europe, which were the markets affected the most by the global recession. These two regions had a combined decline in system sales of $29.0 million or 32% in fiscal year 2010 when compared to the prior year. Consumable parts revenue for this segment also declined by $6.2 million or 13% in fiscal year 2010 due to lower system utilization by our customers. Excluding the impact of foreign currency changes, sales in the Standard segment declined $45.3 million or 25% in fiscal year 2010 compared to the prior year.

Gross margin in fiscal year 2010 was $56.1 million or 41% of sales compared to $79.9 million or 44% of sales in the prior year. Generally, comparison of gross margin rates in this segment will vary period over period based on changes in our product sales mix and prices, and levels of production volume. The 300 basis point decline in our margins in fiscal year 2010 was primarily attributable to a greater mix of lower margin systems versus the prior year as well as lower fixed-cost absorption and inefficiencies due to lower production rates particularly during the first half of the current fiscal year.

Advanced Segment

In fiscal year 2009, we shut down our CIS Technical Solutions division (“CIS division”) which provided technical services to improve the productivity of automated assembly lines. Technical services provided included robot programming, process improvement, systems integration and production support for which sales and related expenses would have been presented as part of our Advanced segment. The results of this segment have been presented as discontinued operations for the year ended April 30, 2009.



										2011 vs 2010					2010 vs 2009
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2011			2010			2009			$			%		$		%
	(In thousands)
Sales	$	28,637		$	36,235		$	28,971		$	(7,598	)	(21	)%	$	7,264	25	%
% of total company sales	13		%	21		%	14		%				NM				NM
Gross Margin	6,140			11,670			8,459			(5,530		)	(47	)%	3,211		38	%
Gross Margin as % of sales	21		%	32		%	29		%				(1100) bpts				300 bpts

bpts = basis points
NM = not meaningful

Fiscal year 2011 compared to fiscal year 2010

In fiscal year 2011, sales in our Advanced segment decreased $7.6 million or 21%. The decrease was primarily due to the timing of revenue recognition for some of our significant aerospace contracts that were in the production phase during the comparative prior year. During the current fiscal year, a significant number of these aerospace contracts were in the installation phase and are expected to be completed in the first half of fiscal year 2012.

Gross margin in fiscal year 2011 amounted to $6.1 million or 21% of sales compared to $11.7 million or 32% of sales in the prior year. The decrease in gross margin as a percentage of sales when compared to the prior year is attributable to adjustments in original cost estimates on certain aerospace contracts during fiscal year 2011 as more experience was gained and new information obtained regarding installation constraints and customer expectations. The revised cost estimates amounted to $3.4 million, representing an amount valued at less than 10% of the total value of the contracts involved. This resulted in an adjustment in the current year, lowering overall margin for the year ended April 30, 2011.

Fiscal year 2010 compared to fiscal year 2009

Sales in the Advanced segment will vary period over period for various reasons, such as the timing of contract awards, timing of project design and manufacturing schedule, and the timing of shipments to customers.

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In fiscal year 2010, sales in our Advanced segment increased by $7.3 million or 25%. This increase was primarily due to the timing of revenue recognition for some significant aerospace contracts which were in the project design phase during the first half of fiscal 2009.

Gross margin in fiscal year 2010 amounted to $11.7 million or 32% of sales compared to $8.5 million or 29% of sales in the prior year. The improvement in gross margin as a percentage of sales when compared to the prior year was attributable to improved contract pricing as well as continued labor and material efficiencies from consolidating the manufacturing for all our advanced systems in our Jeffersonville, Indiana facility.

Selling, General and Administrative Expenses



							2011 vs 2010					2010 vs 2009
	Fiscal Year Ended April 30,						Increase (Decrease)					Increase (Decrease)
	2011		2010		2009		$			%		$			%
	(In thousands)
Sales and Marketing	$	45,359	$	37,259	$	41,170	$	8,100		22	%	$	(3,911	)	(9	)%
Research and Engineering	10,074		8,104		8,644		1,970			24	%	(540		)	(6	)%
General and Administrative	24,141		25,182		29,506		(1,041		)	(4	)%	(4,324		)	(15	)%
Total Operating Expenses	$	79,574	$	70,545	$	79,320	$	9,029		13	%	$	(8,775	)	(11	)%

Fiscal year 2011 compared to fiscal year 2010

Our consolidated operating expenses decreased 400 basis points as a percentage of sales when compared to fiscal year 2010. However, in total dollars our consolidated operating expenses for the year ended April 30, 2011 increased $9.0 million from fiscal year 2010. The increases were primarily as a result of the following:


•	higher commission expense of $2.7 million on improved sales volume in all geographies and increased sales through our indirect channels;


•	an increase of $1.9 million as a result of the reinstatement of previously reduced wages and suspended employee benefits in the latter half of fiscal year 2010 and into the first half of fiscal year 2011, as well as incremental investments in our employees in the last quarter of fiscal year 2011;


•	the timing of investments for new product development which increased $1.6 million over the prior year comparative period;


•	increased marketing and related travel expense of $1.1 million due to the timing and activity of tradeshows and the generation of customer leads; and


•	additional depreciation expense of $0.4 million related to our new ERP system which was placed into service in October of fiscal year 2010.

Fiscal year 2010 compared to fiscal year 2009

Our consolidated operating expenses decreased by $8.8 million or 11% when compared to fiscal year 2009. This decrease was primarily as a result of the following:


•	the successful implementation of cost cutting initiatives including reduction in staffing levels, temporary wage reductions and benefit suspension for part of fiscal year 2010, which resulted in a decrease of $3.9 million;


•	lower commission expense of $0.6 million based on lower sales volume;


•	timing of investments for new product development which decreased $0.7 million; and


•	lower professional fees for consulting of $4.6 million based on the deferral of various projects during the fiscal year.

These reductions were offset by an increase in costs related to depreciation expense of $1.2 million for our new ERP system which was placed into service in the second quarter of fiscal year 2010.

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Interest Income (Expense), net



										2011 vs 2010					2010 vs 2009
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2011			2010			2009			$			%		$			%
	(In thousands)
Interest Income	$	106		$	252		$	494		$	(146	)	(58	)%	$	(242	)	(49	)%
Interest Expense	(1,776		)	(2,374		)	(1,562		)	(598		)	(25	)%	812			52	%
Net Interest Income (Expense)	$	(1,670	)	$	(2,122	)	$	(1,068	)	$	(452	)	(21	)%	$	1,054		99	%

Our interest income was $0.1 million, $0.3 million, and $0.5 million for the respective fiscal years ended April 30, 2011, 2010, and 2009. The sequential declines in fiscal years 2011 and 2010 were mainly the result of lower average cash balances and interest rates on highly liquid cash and cash equivalents.

Our interest expense primarily consists of imputed interest on two subordinated notes that carry a below market interest rate, amortization of deferred financing fees and interest charges on the used and unused portion of our Credit Facility, as well as outstanding letters of credit. The decrease in interest expense compared to fiscal year 2010 is primarily due to lower average balances outstanding on our Credit Facility, as well as lower balances in outstanding standby letters of credit. In addition, fiscal year 2010 included a $0.3 million write-off of deferred financing fees as a result of reducing our available borrowing capacity by 50%. Interest expense in fiscal year 2010 increased over fiscal year 2009 primarily due to imputed interest of $0.7 million related to the two subordinated notes. Interest charged on outstanding balances on our Credit Facility as well on outstanding standby letters of credit in fiscal year 2010 was comparable to fiscal year 2009.

Other Income (Expense), Net

Our Other Income (Expense), net in the Consolidated Statement of Operations is comprised of the following:



									2011 vs 2010			2010 vs 2009
	Fiscal Year Ended April 30,								Increase (Decrease)			Increase (Decrease)
	2011		2010			2009			$		%	$			%
	(In thousands)
Realized Foreign Exchange Gains (Losses), net	$	177	$	(1,215	)	$	74		$	1,392	NM	$	(1,289	)	NM
Unrealized Foreign Exchange Gains (Losses), net	412		66			(1,571		)	346		NM	1,637			NM
Other	97		38			883			59		NM	(845		)	(96	)%
Other Income (Expense), net	$	686	$	(1,111	)	$	(614	)	$	1,797	NM	$	497		81	%

During the fiscal year ended April 30, 2011, we recorded net Other Income of $0.7 million, compared to net Other Expense of $1.1 million and $0.6 million for the respective fiscal years ended April 30, 2010 and 2009. During fiscal year 2010, we 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 our currency translation account as a component of other comprehensive income. In the fourth quarter of fiscal year 2009, management determined that payment of certain intercompany balances by its foreign subsidiaries would not be required in the foreseeable future. Accordingly, we began to recognize unrealized gains and losses related to these intercompany balances whose settlement was not planned or anticipated in the foreseeable future as a component of other comprehensive income which accounts for the majority of the comparative change in its unrealized net foreign exchange losses from fiscal year 2010 to fiscal year 2009. The remainder of the changes in other income and expense primarily resulted from fluctuations in realized and unrealized foreign exchange gains and losses on revaluation of third party and intercompany settled and unsettled balances whose payment is anticipated in the foreseeable future.

Miscellaneous other income in fiscal year 2009 included royalty income of $0.4 million, net of settlement costs of $0.5 million, from the license of certain patents and $0.3 million from a stockholder in settlement of a claim under Section 16(b) of

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the Exchange Act.

Income Taxes

Our (benefit)/provision for income taxes for our continuing operations over the last three years consisted of:



									2011 vs 2010					2010 vs 2009
	Fiscal Year Ended April 30,								Increase (Decrease)					Increase (Decrease)
	2011		2010			2009			$			%		$			%
	(In thousands)
Current Tax Expense (Benefit)	$	1,139	$	1,206		$	1,470		$	(67	)	(6	)%	$	(264	)	(18	)%
Deferred Tax Expense (Benefit)	1,756		(4,050		)	(9,700		)	5,806			NM		(5,650		)	(58	)%
Total Tax Expense (Benefit)	$	2,895	$	(2,844	)	$	(8,230	)	$	5,739		NM		$	(5,386	)	(65	)%

We recognize 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, we considered numerous factors, including historical profitability, estimated future taxable income and the industry in which we operate. At April 30, 2011, the recorded amount of our deferred tax assets was $21.7 million, net of valuation allowance on certain foreign and domestic NOLs.

Our foreign tax provision consists of current and deferred tax expense (benefit). The United States tax provision consists of current and deferred tax expense (benefit), state taxes and foreign withholding taxes. With the exception of certain of our subsidiaries, it is our general practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As of April 30, 2011, we had 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 our subsidiaries in Taiwan, Japan, and Switzerland for which we provide deferred taxes. During fiscal 2011, we repatriated a total of $1.9 million from one foreign subsidiary that was deemed to be a dividend for tax reporting purposes.

During the respective fiscal years 2010 and 2009, we repatriated a total of $0.2 million and $1.6 million, net of tax of less than $0.1 million and $0.3 million from foreign subsidiaries. In addition, in fiscal year 2009 we recorded a $0.3 million liability for withholding taxes payable on future repatriation of foreign earnings.

Liquidity and Capital Resources

Sources of Cash

Historically, our most significant sources of financing have been funds generated by operating activities, available cash and cash equivalents and available funds from our credit facilities. From time to time, we have borrowed funds from our available revolving credit facilities and have raised funds through the sale of common stock.

Cash Generated by Operating Activities

Cash generated by operating activities for the respective fiscal years ended April 30, 2011 and 2010 was $2.9 million and $3.8 million compared to cash used in operating activities of $6.5 million for the fiscal year ended April 30, 2009. Changes in our working capital resulted in a net use of cash of $14.1 million, $2.8 million, and $23.3 million for the respective fiscal years ended April 30, 2011, 2010, and 2009. The changes in working capital are attributable to the timing of inventory purchases and collection of accounts receivable, purchases and payments to vendors, and deferred revenue and customer deposits due to the timing of contract awards and shipments to customers. Further, fiscal year 2009 use of cash included a cash payment of $8.0 million to OMAX to fund a portion of a patent litigation settlement.

Available Cash and Cash Equivalents

At April 30, 2011 we had total cash and cash equivalents of $9.1 million. To the extent that our cash needs in the

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U.S. exceed our cash reserves and availability under our Credit Facility, we may repatriate cash from certain of our foreign subsidiaries, however, this could be limited by our ability to repatriate such cash in a tax efficient manner. We believe that our existing cash and cash equivalents as of April 30, 2011, anticipated revenue and funds generated from our operations, and financing available under our existing credit facilities will be sufficient to fund our operations for at least the next twelve months. However, in the event there are changes in our expectations or circumstances, we may need to raise additional funds through public or private debt or sale of equity to fund our operations.

In the first quarter of fiscal year 2010, we filed a registration statement on Form S-3 filed with the SEC covering the offer and sale, at our discretion, of up to $35 million in common and preferred stock, warrants, and units. This registration statement was declared effective by the SEC in July 2009. In September 2009, we completed a public offering of 8,998,750 common shares at an offering price of $2.10 per share, generating net proceeds of approximately $17.2 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 outstanding amounts under our Senior Credit Facility.

Refer to Part I, Item 1A - Risk Factors for a discussion of the risks and uncertainties pertaining to our business and industry.

Credit Facilities

We amended our existing Senior Credit Facility Agreement during the fourth quarter of fiscal year 2011, set to mature on June 10, 2011, and entered into a new three-year Credit Facility Agreement which will mature March 2, 2014. Based on anticipated working capital needs, we reduced our total commitment under the new credit facility to $25.0 million. The new agreement provides us with more favorable terms, both in terms of the financial covenants required to be maintained, as well as lower interest rates.



Maximum Consolidated		Minimum Fixed Charge
Leverage Ratio (i)		Coverage Ratio (ii)
2.75x		1.75x

_________________________________


(i)	Defined as the ratio of consolidated indebtedness, excluding the subordinated notes issued to OMAX, to consolidated adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) for the most recent four fiscal quarters.


(ii)	Defined as the ratio of consolidated adjusted EBITDA, less income taxes and maintenance capital expenditures, during the most recent four quarters to the sum of interest charges during the most recent four quarters and scheduled debt repayments in the next four quarters.

The financial covenants are measured on a quarterly basis. Our leverage ratio and fixed charge coverage ratio were 0.57 and 17.2 for the three month period ended April 30, 2011. Our calculations of these financial ratios are reported in Exhibit No. 99.1 of this Annual Report on Form 10-K. 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. All of our domestic assets and certain interests in some foreign subsidiaries are pledged as collateral under the three-year Credit Facility Agreement. We were in compliance with all our financial covenants as of April 30, 2011.

Interest on the Credit Facility is based on the bank’s prime rate or LIBOR rate plus a percentage spread between 0.00% and 2.25% depending on whether it uses the bank’s prime rate or LIBOR rate and based on our current leverage ratio. The Company also pays an annual letter of credit fee ranging from 1.25% to 2.25% 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 April 30, 2011, we had $17.2 million available under our Credit Facility, net of $5.5 million in outstanding borrowings, bearing interest at 3.25% per annum, and outstanding letters of credit of $2.3 million.

There were no outstanding balances under our unsecured Taiwan credit facilities as of April 30, 2011. The total unsecured commitment for the Taiwan credit facilities totaled $3.1 million at April 30, 2011, bearing interest at 2.4% per annum.

We expect to be in compliance with our covenants pursuant to the Credit Facility Agreement for at least the next twelve months. However, in the event that there is a possibility of default, we may institute cost reductions; raise additional funds through public or private debt or sale of equity; possibly seek further amendments to our Credit Facility Agreement or a

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combination of these items. Refer to Part I, Item 1A - Risk Factors for discussion of the risks and uncertainties pertaining to our business and industry.

Other Sources of Cash

In September 2009, we consummated the sale of our building in Hsinchu, Taiwan for $4.7 million and simultaneously entered into an asset lease agreement for an insignificant portion of the building which was treated as an operating lease. This sale concluded our efforts to consolidate our manufacturing activities. We generated net cash proceeds of approximately $0.6 million from the sale of the building, after paying off closing costs, the outstanding balances on the two unsecured credit facilities in Taiwan, and the outstanding mortgage, which aggregated to $4.1 million as of April 30, 2009.

Uses of Cash

Capital Expenditures

Our capital spending plans currently provide for outlays ranging from approximately $6 million to $8 million over the next twelve months, primarily related to the completion of Enterprise Resource Planning system and other information technology related projects, patent and trademark maintenance, and production equipment. It is expected that funds necessary for these expenditures will be generated internally or from available financing. To the extent that funds cannot be generated through operations or we are unable to obtain financing on reasonable terms, we will reduce our capital expenditures accordingly. Our capital spending for the each of the respective fiscal years ended April 30, 2011, 2010, and 2009 amounted to $3.5 million, $10.0 million, and $8.9 million. Capital expenditures primarily consist of investments in our Enterprise Resource Planning system, information technology infrastructure and enhancements to our manufacturing facilities to improve efficiency.

Other Strategic Investments

In fiscal year 2009, we entered into an equity purchase agreement in which we acquired a minority interest in Dardi International (“Dardi”), a waterjet manufacturer based in China, for $2 million in cash. Additionally, we incurred $1.7 million in direct costs attributed to the acquisition. We accounted for the $3.7 million investment in Dardi using the cost method. This investment has been classified as an Other Long-Term Asset on the Consolidated Balance Sheets.

We made the decision to terminate our option to acquire OMAX in fiscal year 2010 following a thorough investigation of financing alternatives to complete the merger and unsuccessful attempts to negotiate a lower purchase price. Refer to Note 18 - Provision for Patent Litigation and Termination of OMAX Merger Agreement of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data for further details on the contemplated merger with OMAX including the execution of a Settlement and Cross Licensing Agreement with OMAX for $29 million payable to OMAX, of which $23 million had been funded as of April 30, 2009.

Borrowings and Repayment of Notes Payable and Other Debt

For the respective fiscal years ended April 30, 2011 and 2009 we had net borrowings on our Credit Facility of $5.2 million and $13.0 million compared to a net repayment of $12.7 million for the fiscal year ended April 30, 2010. Activity on our Credit Facility will fluctuate to augment our working capital needs. In addition, we also had net repayments of long-term obligations and other debt of less than $0.1 million and $5.6 million for the respective fiscal years ended April 30, 2011 and 2010 compared to net borrowings of $1.5 million for the fiscal year ended April 30, 2009.

Disclosures about Contractual Obligations and Commercial Commitments

The following table summarizes our known future payments pursuant to certain contracts as of April 30, 2011 and the estimated timing thereof. More detail about our contractual obligations and commercial commitments are in Note 7 - Notes Payable and Note 8 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

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	Payment by Fiscal Year
	2012		2013		2014		2015		2016		Thereafter		Total
	(In thousands)
Operating Leases	$	2,909	$	2,044	$	724	$	616	$	606	$	647	$	7,546
Long-term Debt, Notes Payable & Capital Leases	26		8		10		11		9		—		64
Interest on Long-term Debt and Notes Payable	24		—		—		—		—		—		24
Purchase Commitments (i)	10,661		—		—		—		—		—		10,661
Subordinated Notes (ii)	—		—		10,824		—		—		—		10,824
Liabilities related to Unrecognized Tax benefits, including Interest and Penalties (iii)	—		—		—		—		—		9,796		9,796
Total	$	13,620	$	2,052	$	11,558	$	627	$	615	$	10,443	$	38,915

Purchase commitments include agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include agreements that are cancelable without penalty. Additionally, although they are not legally binding agreements, open purchase orders for inventory purchases are included in the table above. Substantially all open purchase orders are fulfilled within 30 days. We expect to fund these commitments with existing cash and our cash flows from operations in future periods.


ii.	Subordinated promissory notes with an aggregate face value of $10 million issued to OMAX in fiscal year 2010. Refer to Note 18 - Provision for Patent Litigation and Termination of OMAX Merger Agreement of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data for further detail.


iii.	We have unrecognized tax benefits of $9.8 million associated with uncertain tax positions as of April 30, 2011. This potential liability may result in cash payments to tax authorities. The timing of payments related to these obligations is uncertain; however, none of this amount is expected to be paid within the next twelve months.

Off-Balance Sheet Arrangements

As of April 30, 2011, the Company had letter-of-credit reimbursement agreements totaling $2.3 million compared to $4.6 million at April 30, 2010. These letter-of-credit agreements relate to performance on contracts with our customers and vendors.

Critical Accounting Estimates

Our discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make certain assumptions and estimates about future events, and apply 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 our consolidated financial statements. We base our assumptions, estimates, and judgment on historical experience, current trends and other factors which management believes to be relevant and appropriate at the time our consolidated financial statements are prepared. On a regular basis, management reviews its assumptions, estimates, and judgments to ensure that our consolidated financial statements are presented fairly. However, because future events cannot be determined with certainty, actual results may differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are summarized in Note 1 - The Company and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data. Management identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates that are inherently uncertain.

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Accounting Policy	Judgments/Uncertainties Affecting Application

Impairment of Long Lived Assets	-	Judgment about triggering events
	-	Recoverability of investments through future operations
	-	Estimated useful lives of assets
	-	Estimates of future cash flows
Valuation of Deferred Tax Assets and Uncertain Tax Positions	-	Ability of tax authority decisions to withstand legal challenges and appeals
	-	Anticipated future decisions of tax authorities
	-	Application of tax statutes and regulations to transactions
	-	Ability to utilize tax benefits through carrybacks to prior periods and carryforwards to future periods
Contingencies	-	Judgment about likelihood of event(s) occurring
	-	Estimated financial impact of event(s)
	-	Regulatory and political environments and requirements
Revenue Recognition	-	Judgment regarding fair value in multiple element arrangements
	-	Estimates about anticipated contract costs and progress made towards the completion of projects
Allowance for Doubtful Accounts	-	Judgment regarding the amount of probable credit loss on existing receivables
Inventory Reserves	-	Judgment regarding inventory aging, forecasted consumer demand, the promotional environment and technological obsolescence
	-	Application of judgment regarding historical results and current inventory loss trends
Warranty Liability	-	Judgment regarding historical experience to estimate future liability
Cost Method Investments	-	Judgment about fair value
	-	Recoverability of investments

Impairment of Long Lived Assets

We routinely consider whether indicators of impairment are present for our long-lived assets, which consist of property and equipment, particularly our manufacturing equipment, and patents subject to amortization. Factors we consider include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of long-lived assets or the strategy for the overall business; and significant negative industry or economic trends. If such indicators are present, we determine whether the sum of the estimated undiscounted cash flows attributable to the asset group in question is less than their carrying value. For purposes of impairment testing, long-lived assets are grouped at the component level, which for us is by regional locations, as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the sum of the undiscounted cash flows attributable to the asset group is less than the carrying value of the asset group, an impairment loss is recognized based on the excess of the carrying value of the asset group over its respective fair value. Fair value is determined by discounting estimated future cash flows, appraisals or other methods deemed appropriate. If the asset group determined to be impaired is to be held and used, we recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset group is less than the assets' carrying value. The fair value of the assets then becomes the assets' new carrying value, which is depreciated over the remaining estimated useful life of the assets.

We concluded that there were no long-lived assets impairment indicators in each of the fiscal years ended April 30, 2011 and 2010. We will continue to monitor circumstances and events in future periods to determine whether asset impairment testing is warranted based on the existence of one or more of the above impairment indicators.

Valuation of Deferred Tax Assets and Uncertain Tax Positions

We account for uncertain tax positions in accordance with ASC 740 which utilizes a two-step approach for evaluating tax

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positions. Recognition (Step 1) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step 2) is only addressed if Step 1 has been satisfied. Under Step 2, the tax benefit is measured at the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon settlement. As used in ASC 740, the term “more likely than not” means that the likelihood of an occurrence is greater than 50%. To the extent that we prevail in matters for which unrecognized tax benefits have been established, or are required to pay amounts in excess of our unrecognized tax benefits, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require the use of our cash and would result in an increase to our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.

Our annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating tax positions. Tax positions are reviewed quarterly and balances are adjusted as new information becomes available. Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. Future tax benefits of tax losses and credit carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative net operating losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future federal, state and foreign pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our business.

As of April 30, 2011, we had approximately $56.4 million of domestic net operating loss and $36.8 million of state net operating loss carryforwards to offset certain earnings for federal and state income tax purposes. These net operating loss carryforwards expire between fiscal year 2023 and fiscal year 2031. Net operating loss carryforwards in foreign jurisdictions amount to $47.1 million. A valuation allowance of $29.5 million has been provided against these net operating loss carryforwards in certain of our foreign jurisdictions as realization of the tax benefit in those jurisdictions is uncertain. Most of the foreign net operating losses can be carried forward indefinitely, with certain amounts expiring between fiscal years 2014 and 2017. The federal, state and foreign net operating loss carryforwards per the income tax returns filed include uncertain tax positions taken in prior years. Due to the application of ASC 740, the net operating loss carryforwards per the income tax returns are larger than the net operating loss carryforwards considered more likely than not to be realized in recognizing deferred tax assets for consolidated financial statement purposes. We also have a capital loss carryover of $1.4 million, for which we provide a valuation allowance, that expires after 2016. Utilization of net operating losses may be subject to limitation due to ownership changes and other limitations provided by the Internal Revenue code and similar state provisions. If such a limitation applies, the net operating loss may expire before full utilization.

Our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our filing tax positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities.

Contingencies

At any time, we may be involved in legal proceedings or other claims and assessments arising in the normal course of business. Our policy is to routinely assess the likelihood of any adverse judgments or outcomes related to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is based on historical experience and/or after analysis of each known issue. We record reserves related to these 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. As of April 30, 2011, we have accrued our estimate of the probable liabilities for the settlement of these claims. Refer to Note 8 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

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Revenue Recognition

We sell ultrahigh-pressure waterjet systems. Sales of waterjet systems within in the Standard segment are primarily related to our cutting and cleaning systems using ultrahigh-pressure water pumps and do not require significant custom configuration or modifications. Installation of these waterjet systems by us is not essential to the functionality of the waterjet systems but we do provide installation as a separate service. Sales of waterjet systems within the Advanced segment are generally 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. Installation by us is essential to the functionality of waterjet systems sold within the Advanced segment.

We recognize revenue for sales of ultrahigh-pressure waterjet pumps, consumables, and services, and billing for freight charges, in accordance with ASC 605, Revenue Recognition , (“ASC 605”). Additionally, because FlowMaster^TM software, our PC-based waterjet control, is essential to the functionality of the Company's waterjet systems, the Company recognizes revenue on sales of waterjet systems in accordance with ASC 985, Software . Specifically, for our waterjet systems that do not require significant modification or customization, the Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer, the price is fixed or determinable, and collectibility is reasonably assured, or probable in the case of sale of waterjet systems.

Unearned revenue is recorded for products or services that have not been provided but have been invoiced under contractual agreements or paid for by a customer, or when products or services have been provided but all the criteria for revenue recognition have not been met.

We recognize revenue for delivered elements only when the delivered elements have standalone value, fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. For contract arrangements that combine deliverables such as systems with embedded software, and installation, each deliverable is generally considered a separate unit of accounting or element. The consideration received is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. In cases where there is objective and reliable evidence of the fair value of the undelivered item in an arrangement but no such evidence for the delivered item, the residual method is used to allocate the arrangement consideration.

In general, sales of our waterjet systems within our Standard segment are FOB shipping point or FOB destination, depending on geographical location, and the title passes to the customer based on the specific terms in each contract.

For complex aerospace and automation systems designed and manufactured to buyers' specification, the Company recognizes revenue using the percentage of completion method. Typical lead times can range from 12 to 24 months for these systems. Sales and profits on such contracts are recorded based on the ratio of total actual incurred costs to date to the total estimated costs for each contract (the “cost-to-cost” method). Management reviews these estimates as work progresses and the effect of any change in cost estimates is reflected in the calculation of the expected margin and the percent complete. Accounting for the profit on a contract requires (1) the total contract value, (2) the estimated total cost to complete which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the scope of work, and (3) the measurement of progress towards completion. The estimated profit or loss on a contract is equal to the difference between the contract value and the estimated total cost to completion. If the contract is projected to create a loss, the entire estimated loss is recognized in the period such loss first becomes known. Adjustments to original estimates may be required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. For contract modifications supported by a change in contract price, profit on such contract modifications are only recognized upon receipt of a signed contract amendment and only in the proportion of such contract's progress towards completion. For modifications not supported by a change in contract price, those additional costs are treated as contract costs and charged to expense in the proportion of such contract's progress towards completion. A number of internal and external factors affect our cost of sales estimates, including material costs, labor rates and efficiency variances and installation and testing requirements. While webelieve that our historical experience provides a sound basis for our estimates, changes in the customer's requirements, design or other changes in the specifications, or in the timing of delivery and installation may affect the timing of revenue related to, or the gross margin on, a system if they are substantially different from what was anticipated. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the percentage of completion method affect the amounts reported in our financial statements.

Shipping revenues and expenses are recorded in revenue and cost of goods sold, respectively.

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Allowance for Doubtful Accounts

The allowance for doubtful accounts is our best estimate of the amount of probable credit losses on existing receivables. We estimate the allowance based on the age of the related receivables, knowledge of the financial condition of our customers, review of historical receivables and reserve trends and other relevant information. Account balances are charged against the allowance when management determines that it is probable the receivable will not be recovered.

Valuation of Obsolete/Excess Inventory

We currently write-down obsolete or excess parts and equipment inventory that is no longer used due to design changes to our products or lack of customer demand. We regularly monitor our inventory levels and, if we identify an excess condition based on our usage, we record a corresponding inventory reserve which establishes a new cost basis for our inventory. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded markdowns or an increase in that newly established cost basis. The amount of inventory write-down requires the use of management judgment regarding technological obsolescence and forecasted customer demand. If estimates regarding consumer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses that could be material.

Warranty Liability

Products are warranted to be free from material defects for a period of at least one year from the date of installation. Warranty obligations are limited to the repair or replacement of products. Warranty liability is recorded at time of the sale. Flow's warranty accrual is reviewed quarterly by management for adequacy based upon recent shipments and historical warranty experience. Credit is issued upon receipt of the returned goods, or, if material, at the time of notification and approval.

Valuation of Cost Method Investments

We evaluate our cost method investments for impairment on a quarterly basis in accordance with ASC 325, Cost Method Investments (“ASC 325”), which specifically addresses accounting for cost method investments subsequent to initial measurement. An impairment charge is recorded whenever a decline in value of an investment below its carrying amount is determined to be other-than-temporary. In determining if a decline is other-than-temporary, factors such as the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the affiliate and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery are considered.

Recently Issued Accounting Pronouncements

Refer to Note 2 - Recently Issued Accounting Pronouncements of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, for a discussion of recently issued accounting developments.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The types of market risk we are exposed to in our normal business activities are interest rate risk and currency exchange risk.

Interest Rate Risk

We are exposed to fluctuations in interest rates through our issuance of fixed rate and variable rate debt. At April 30, 2011, we had $5.5 million in interest bearing debt, all of which was related to borrowings under our Credit Facility Agreement. Interest on the Credit Facility is based on the bank's prime rate or LIBOR rate plus a percentage spread between 0.00% and 2.25% depending on whether we use the bank's prime rate of LIBOR rate and based on our current leverage ratio. The Company also pays an annual letter of credit fee ranging from 1.25% to 2.25% 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. Refer to Note 7 - Notes Payable of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, for additional contractual information on our notes payable. As of April 30, 2011, a 10% change in variable interest rates would not result in a material change in interest expense on a rolling twelve-month basis. At April 30, 2011, we had no derivative instruments to offset the risk of interest rate changes. We may choose to use derivative instruments, such as interest rate swaps, caps, collars and put or call options, to manage the risk

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associated with interest rate changes in future periods.

Foreign Currency Exchange Rate Risk

We transact business in a number of countries around the world and as a result are exposed to changes in foreign currency exchange rates. Costs in some countries are incurred, in part, in currencies other than the applicable functional currency. Our non-U.S. operations account for approximately 57% of consolidated revenue. Based on our results for the year ended April 30, 2011 for our foreign subsidiaries, a hypothetical 10% favorable and unfavorable change in foreign currency exchange rates would have affected our annualized foreign-currency-denominated operating results by approximately $5.0 million. Our consolidated financial position and cash flows could be similarly impacted. We may from time to time selectively utilize forward exchange rate contracts which we may or may not designate as cash flow hedges to protect against the adverse effect exchange rate fluctuations may have on foreign currency denominated accounts receivable and accounts payable (both trade and inter-company).

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Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements are filed as a part of this report:



	Page in this
Index to Consolidated Financial Statements	Report

Report of Independent Registered Public Accounting Firm	37
Consolidated Balance Sheets as of April 30, 2011 and 2010	38
Consolidated Statements of Operations for the fiscal years ended April 30, 2011, 2010, and 2009	39
Consolidated Statements of Cash Flows for the fiscal years ended April 30, 2011, 2010, and 2009	40
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the fiscal years ended April 30, 2011, 2010, and 2009	42
Notes to Consolidated Financial Statements	43
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts	67

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Flow International Corporation

Kent, Washington

We have audited the accompanying consolidated balance sheets of Flow International Corporation and subsidiaries (the "Company") as of April 30, 2011 and 2010, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended April 30, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Flow International Corporation and subsidiaries as of April 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of April 30, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 23, 2011 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Seattle, Washington

June 23, 2011

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FLOW INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)

	April 30,
	2011			2010
ASSETS
Current Assets:
Cash and Cash Equivalents	$	9,096		$	6,367
Restricted Cash	1,766			639
Receivables, net	47,082			35,749
Inventories, net	28,609			22,503
Other Current Assets	11,539			8,837
Total Current Assets	98,092			74,095
Property and Equipment, net	19,104			21,769
Intangible Assets, net	4,738			4,504
Deferred Income Taxes, net	25,171			26,330
Other Long-Term Assets	5,958			4,511
Total Assets	$	153,063		$	131,209

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Notes Payable	$	5,500		$	350
Current Portion of Long-Term Obligations	25			61
Accounts Payable	17,363			15,306
Accrued Payroll and Related Liabilities	7,080			5,938
Taxes Payable and Other Accrued Taxes	2,378			1,329
Deferred Revenue and Customer Deposits	13,317			10,146
Other Accrued Liabilities	11,298			9,052
Total Current Liabilities	56,961			42,182
Deferred Income Taxes	5,711			3,856
Subordinated Notes	8,723			7,954
Other Long-Term Liabilities	2,214			1,593
Total Liabilities	73,609			55,585

Commitments and Contingencies
Shareholders’ Equity:
Series A 8% Convertible Preferred Stock, $.01 par value, 1,000 shares authorized; no shares issued and outstanding	—			—
Common Stock, $.01 par value, 84,000 shares authorized; 47,378 and 46,927 shares issued and outstanding	469			465
Capital in Excess of Par	161,741			159,605
Accumulated Deficit	(79,121		)	(79,887		)
Accumulated Other Comprehensive Income (Loss):
Defined Benefit Plan Obligation, net of income tax	(68		)	9
Cumulative Translation Adjustment, net of income tax	(3,567		)	(4,568		)
Total Shareholders’ Equity	79,454			75,624
Total Liabilities and Shareholders’ Equity	$	153,063		$	131,209
See Accompanying Notes to the Consolidated Financial Statements

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FLOW INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

	Fiscal Year Ended April 30,
	2011			2010			2009
Sales	$	216,524		$	173,749		$	210,103
Cost of Sales	132,063			105,982			121,775
Gross Margin	84,461			67,767			88,328
Operating Expenses:
Sales and Marketing	45,359			37,259			41,170
Research and Engineering	10,074			8,104			8,644
General and Administrative	24,141			25,182			29,506
Provision for Patent Litigation	—			—			29,000
Goodwill Impairment	—			—			2,764
Restructuring and Other Operating Charges, net	—			4,222			6,878
Total Operating Expenses	79,574			74,767			117,962
Operating Income (Loss)	4,887			(7,000		)	(29,634		)
Interest Income	106			252			494
Interest Expense	(1,776		)	(2,374		)	(1,562		)
Other Income (Expense), net	686			(1,111		)	(614		)
Income (Loss) Before Taxes	3,903			(10,233		)	(31,316		)
Benefit (Provision) for Income Taxes	(2,895		)	2,844			8,230
Income (Loss) from Continuing Operations	1,008			(7,389		)	(23,086		)
Loss from Discontinued Operations, net of Income Tax of $0, $0, and $0	(242		)	(1,095		)	(733		)
Net Income (Loss)	$	766		$	(8,484	)	$	(23,819	)
Basic and Diluted Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.02		$	(0.17	)	$	(0.61	)
Discontinued Operations	—			(0.02