Edgar Filing: FLOW INTERNATIONAL CORP

Form 10K - 04.30.12

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, 2012
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 $118,662,230 as of October 31, 2011, the last business day of the registrant's most recently completed second fiscal quarter, based on a closing price of $2.59 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 47,918,765 shares of Common Stock, $0.01 par value per share, outstanding as of June 15, 2012.

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, 2012 (the “2012 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 2012 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		15
	Item 2	Properties		15
	Item 3	Legal Proceedings		15
	Item 4	Mine Safety Disclosures		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		18
	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		67
	Item 9A	Controls and Procedures		67
	Item 9B	Other Information		70


PART III:
	Item 10	Directors, Executive Officers and Corporate Governance		70
	Item 11	Executive Compensation		70
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		70
	Item 13	Certain Relationships and Related Transactions, and Director Independence		70
	Item 14	Principal Accounting Fees and Services		70


PART IV:
	Item 15	Exhibits, Financial Statement Schedules		70
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 the effects of global financial and economic conditions, credit and equity market volatility and continued fluctuations in the global economy and the impact this may have on our business and financial condition;


•	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 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 belief that we offer the broadest product line and provide a superior product at every price point;


•	statements regarding our continued investments in lead generation, product enhancements, new product development and in our employees which we believe are critical to achieving our strategic objectives;


•	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 distribution;


•	statements regarding our expectation that our recently introduced Mach 4 and 2 series products, as well as our HyPlex Prime direct drive pump, will have strong contributions to our results in fiscal year 2013 and beyond;


•	statements regarding our belief that our continued efforts to streamline our manufacturing process will ensure that we optimize the most cost efficient sources of labor while maintaining a high level of quality;


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


•	statements regarding our ability to mitigate the risk of higher commodity and fuel prices;


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


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


•	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, 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 repay our subordinated notes in future periods;


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


•	statements regarding anticipated results of potential or actual litigation; and


•	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 developments, except as required by federal securities laws.

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PART I

Item 1. 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 and surface preparation 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, 2012.

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 2000s, we:


•	invented the abrasive waterjet;


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


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


•	developed the first 60,000 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;


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


•	introduced the HyPlex Prime^Rpump, combining patented HyperJet^R seal technology with the efficiency of direct drive, while enabling faster, more accurate and repeatable maintenance;


•	introduced the Mach 4c, specifically designed to support HyperPressure^TM technology, featuring an exclusive Roller Pinion mechanical motion drive system and expandable modular design to address changing customer needs; and


•	introduced the Mach 2c, designed to incorporate Dynamic Waterjet^R into a system at a price point where that technology was previously unavailable.

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.

We believe that, by growing our revenues and operating income, successfully improving our business and manufacturing

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processes, and maximizing our cash flows, we will deliver enhanced financial performance, and also be in a position to capitalize on growth opportunities that may arise. Our business strategies are designed to expand 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 to mid-tier and economy product line customers.

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.

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 and surface preparation 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 and surface preparation 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 and surface preparation.

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 1/32 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.

Waterjet cutting is recognized as a more flexible, cost effective and accurate alternative to traditional cutting methods such as mills, routers, lasers, EDM, saws or plasma. It offers greater versatility in the types of products it can cut, and, because it cuts without creating 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

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trimming.

Surface Preparation and Industrial Cleaning Products. Our ultrahigh-pressure surface preparation and industrial cleaning systems are used for fast coating removal. These systems typically 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 materials. 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 the respective fiscal years ended April 30, 2012 and 2011.

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 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

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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 and surface preparation 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.

Financial information about our segments is included in Note 16 - 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 2012, 59%, or $150.4 million, of our total consolidated sales were to customers outside the United States, this included:


•	$27.2 million of exports from the United States;


•	$51.4 million of sales from our Europe, Middle East, and Africa locations; and


•	$71.8 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, roller pinions, 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.

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

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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, 2012, we expensed $10.9 million related to product research and development as compared to $10.1 million in fiscal year 2011 and $8.1 million in fiscal year 2010. Research and development expenses as a percentage of revenue were between 4% and 5% during each of the respective fiscal years ended April 30, 2012, 2011, and 2010. 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 slightly from $46.5 million at April 30, 2011 to $44.7 million at April 30, 2012. The backlog at April 30, 2012 and 2011 represented 18% and 21% of our trailing twelve months sales as of April 30, 2012 and 2011, 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. Individual orders of our products and services can involve the delivery of several hundred thousand dollars of products or services at one time. Due to possible changes in customer 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

We fund our business operations through a combination of available cash, cash equivalents and cash flows generated from operations. We may also draw upon our Credit Facility to augment working capital needs. We generally require advance payments as deposits on customized equipment and standard systems, and we also require progress payments for customized equipment during the manufacturing of these products, or prior to product shipment and installation.

Employees

We had approximately 640 full-time employees as of April 30, 2012, of which 63% were located in the United States, and 37% were 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”). All material we file with the SEC is publicly available at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and may also be obtained by calling the SEC at 1-800-SEC-0330. In addition, 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 (including related filings in eXtensible Business Reporting Language ("XBRL") format), 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, 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.

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 and introduce 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.

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

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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.

The global macroeconomic environment continues to be volatile and its impact on the credit markets could adversely affect our results of operations.

The macroeconomic environment continues to remain volatile and to the extent that it deteriorates it 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.

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 15, 2012, the closing price of our common stock was $2.95. 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;


•	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;


•	negative changes in global financial markets and economic conditions;


•	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 were to become the target of such a situation, it could result in substantial costs and would divert management's attention and resources.

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 fiscal 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, approximately $2.8 million at the initial date of assessment, in additional taxes, penalties and fines. In April 2010, we filed an appeal to contest the Swedish tax authority's assertion. Since the filing of our appeal, there has been further correspondence with the Swedish tax authorities as we continue to contest the findings, and there has been a hearing before the Swedish district court regarding the appeal, but there has been no decision in the matter and we are awaiting this court's decision. We recorded a charge in fiscal year 2010 related to the periods during which we owned Avure and, as of April 30, 2012, the liability is approximately $1.3 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.

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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.

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.

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.

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, 2012, we had $20.8 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

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our business operations. Our servers and those of third-parties we use in our operations are vulnerable to computer viruses, cyber attacks, 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.

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

In fiscal year 2012, approximately 59% 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;


•	changes in a specific country's or region's political 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 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.

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

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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.

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. 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.

Violations of the U.S. Foreign Corrupt Practices Act could subject us to civil or criminal liability.

As a global company, we are also subject to risks that our employees, representatives or agents could conduct our operations outside the U.S. in ways that may violate the U.S. Foreign Corrupt Practices Act or other similar anti-bribery laws. Although we have policies and procedures to comply with those laws, our employees, representatives and agents may take actions that violate our policies. Further, indirect sales representatives or other agents that help sell our products or provide other services may violate our anti-bribery policies and procedures as we do not have direct oversight into their conduct. Any such violations could result in fines and other penalties and could otherwise have a negative impact on our business.

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, job shops, stone and tile and surface preparation. 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.

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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, 2012.

Item 2. Properties

We occupied approximately 357 thousand square feet of floor space on April 30, 2012 for manufacturing, warehousing, engineering, sales offices, and administration, of which approximately 59% was located in the United States.

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



	Owned	Leased
	(In square feet)
Standard	15,820	278,898
Advanced	40,245	22,180
Total	56,065	301,078

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, Toyko, and Yokohama, 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. Mine Safety Disclosures

Not applicable

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 2012		Fiscal Year 2011
	Low	High	Low	High
First Quarter	$2.98	$4.34	$2.16	$3.25
Second Quarter	$1.90	$3.48	$2.03	$2.94
Third Quarter	$2.26	$3.95	$2.64	$4.33
Fourth Quarter	$3.64	$4.49	$3.75	$4.72

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Holders of the Company's Common Stock

As of June 15, 2012, there were approximately 900 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, if any, to finance development and expansion of our business and reduce any debt and does not expect to declare dividends to common shareholders in the foreseeable future. Additionally, 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 our 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.



	4/07	4/08	4/09	4/10	4/11	4/12
Flow International Corporation	100.00	86.17	15.64	27.15	37.03	35.31
S&P Smallcap 600	100.00	90.95	63.62	94.02	114.16	115.39
NASDAQ Composite	100.00	92.99	68.86	97.61	118.78	122.43
Dow Jones US Industrial Machinery	100.00	113.19	67.4	109.99	145.61	140.67

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

Performance Graph Assumptions


•	Assumes a $100.00 investment in our common stock and in each index in April 30, 2007 and tracks it through to April 30, 2012.


•	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,
	2012		2011		2010			2009			2008
	(In thousands, except per share data)
Statement of Operations Data:
Sales	$	253,768	$	216,524	$	173,749		$	210,103		$	244,259
Income (Loss) From Continuing Operations	9,389		1,008		(7,389		)	(23,086		)	21,911
Net Income (Loss)	9,449		766		(8,484		)	(23,819		)	22,354

Basic Income (Loss) Per Share:
Income (Loss) From Continuing Operations	0.20		0.02		(0.17		)	(0.61		)	0.59
Net Income (Loss)	0.20		0.02		(0.19		)	(0.63		)	0.60

Diluted Income (Loss) Per Share:
Income (Loss) From Continuing Operations	0.20		0.02		(0.17		)	(0.61		)	0.58
Net Income (Loss)	0.20		0.02		(0.19		)	(0.63		)	0.59



	April 30,
	2012		2011		2010		2009		2008
	(In thousands)
Balance Sheet Data:
Working Capital	$	56,445	$	41,131	$	31,913	$	27,923	$	56,126
Total Assets	167,066		153,063		131,209		144,960		151,155
Short-Term Debt	21		5,525		411		16,593		2,095
Long-Term Obligations (i)	9,631		8,762		7,972		1,937		2,333
Shareholders' Equity	91,048		79,454		75,624		62,711		86,064


i.	Long-Term Obligations at April 30, 2012, 2011, and 2010 include subordinated notes of $9.6 million, $8.7 million, and $8.0 million, respectively.

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

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, 2012, 2011 and 2010. 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

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 surface preparation applications, delivering profitable waterjet solutions and dynamic business growth opportunities to our customers.

Fiscal Year 2012 Highlights

During fiscal year 2012, we saw the achievement of all-time revenue records, in the aggregate, for our Standard segment and for our spare parts business, stable overall gross profit margins year over year, and improved operating leverage with disciplined control over expenses. This resulted in net income of $9.4 million, adjusted earnings before interest, tax and depreciation ("Adjusted EBITDA") of $24.4 million and a positive net cash position of $12.9 million for the fiscal year ended April 30, 2012.

On an annual basis:


•	Overall revenues increased 17% to $253.8 million for fiscal year 2012, an all-time high, and an increase from $216.5 million in the comparative prior year;


•	Standard segment revenue reached $230.3 million, a 23% improvement over the prior fiscal year, and an all-time high for the segment;


•	We achieved record annual sales from our global spare parts business at $80.0 million, a 14% growth over the prior fiscal year;


•	At $150.5 million, our Standard segment systems sales in fiscal year 2012 increased 28% over fiscal year 2011 with double digit growth in all regions;


•	Advanced segment systems sales were $23.4 million, which was 18% lower than fiscal year 2011, as expected, primarily due to the timing of contracts;


•	Our overall gross profit margin has remained consistent year over year at 39%;


•	Our operating income was $14.7 million or 6% of sales compared with operating income of $4.9 million or 2% of sales in the prior fiscal year;


•	We generated net income of $9.4 million or earnings per share of $0.20, compared to net income of $0.8 million or $0.02 per share in the comparative prior year;


•	Our Adjusted EBITDA was $24.4 million for fiscal year 2012, an increase of approximately $10.6 million over the prior year. Refer to reconciliation of Adjusted EBITDA to Net Income (Loss) set forth below;


•	We maintained a strong balance sheet with a net cash position of $12.9 million, a current ratio of 2.0 and a long-term debt to equity ratio of 0.1; and

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•	Total cash generated by operating activities as defined in our cash flow statement was $12.7 million for the fiscal year ended April 30, 2012 as compared to $2.9 million for the fiscal year ended April 30, 2011.

Looking Ahead

We continue to build significant and sustainable competitive advantages that capitalize on the waterjet category growth opportunities. We believe that we are well positioned to continue growing our business organically over the long-term through product development, unmatched global customer access and continued operating leverage.

•

Product Development We continue to make strategic investments in research and development for existing and new products, and to invest in research and development of advanced and innovative technologies for future application. We believe that delivering innovative and high-value solutions is critical to meeting customer needs and achieving our future growth. We remain positive with regard to our recently introduced Mach 4 and Mach 2 series products, as well as our HyPlex Prime direct drive pump. We expect strong contributions from these new product offerings in fiscal year 2013 and beyond.


•	Customer Access Our two distribution channels blanket the world, selling into more than 60 countries, and are working together to drive sustainable growth. We intend to continue making significant investments to expand our access to potential customers by continued development of both our direct and indirect distribution channels, which are unparalleled in the industry.

•

Operating Leverage We continue to demonstrate our ability to improve operating margins by leveraging expenses as revenue increases. While we intend to continue investing in our business, disciplined cost control remains a high priority to ensure sustainable long-term profitability while maintaining our competitiveness in the markets we serve. The timing of investments in our business may create variability in our operating results.

Management remains focused on creating long-term shareholder value. We believe that Adjusted EBITDA, which we define as net income (loss), as 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, and other non-cash charges, which includes such items as stock-based compensation expense, foreign currency gains or losses, and other allowable add backs pursuant to our Credit Facility Agreement, is a good measure of our core performance in creating this value.

Reconciliation of Adjusted EBITDA to Net Income (Loss):

(in 000s)



	Fiscal Year Ended April 30,
	2012			2011		2010
Net Income (Loss)	$	9,449		$	766	$	(8,484	)
Add Back:
Depreciation and Amortization	6,208			6,302		5,725
Income Tax Provision (Benefit)	3,276			2,895		(2,844		)
Interest Charges	1,112			1,776		2,374
Non-Cash Charges	4,377			1,758		3,380
Other (i)	(60		)	242		5,724
Adjusted EBITDA	$	24,362		$	13,739	$	5,875



(i) Allowable Add backs Pursuant to Credit Facility Agreement

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 to 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

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information used by us in our financial and operational decision making. Our calculation of 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 several factors, principally the general economic conditions within our global markets, fluctuations in the relationship of foreign currencies to the U.S. dollar, product and project mix and the impact of investments in our business. These key factors have impacted the comparability of our results of operations in the past and are likely to affect them in the future.

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. 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.

Product and Project Mix

Our profit margins vary in relation to the relative product and geographic mix, including the market 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.

Foreign Currency Fluctuations

The volatility in the global economic environment continues to result in significant volatility in the global currency

markets. For the year ended April 30, 2012, approximately 59% of our total consolidated sales were to customers outside the United States. Since the majority of our international operations are conducted in currencies other than the U.S. dollar, currency

fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar

amounts. During fiscal year 2012, the U.S. dollar strengthened against the average exchange rates for these currencies versus the comparable prior year period, negatively impacting the translation of our international revenues and earnings during the current fiscal year.

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.

Reinstatement of Previously Reduced Wages and Suspended Employee Benefits

As the global recession set in during the end of fiscal year 2008 we responded by implementing permanent and temporary

changes to adjust our operating costs. Some of these changes included a temporary reduction in wages or hours worked for a

majority of our employees and suspension of certain employee benefits. While these temporary wage reductions and benefit

suspensions helped us through the economic downturn, they did not fit into our long-term strategy of attracting and retaining

skilled and knowledgeable people. We therefore initiated the reinstatement of these wages and employee benefits using a

phased in approach starting in the third quarter of fiscal year 2010. As a result of these reinstatements, our comparable year-over-year operating expenses are higher in the current comparative periods.

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

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April 30, 2012, 2011 and 2010, will impact year-over-year operating expense comparisons.

Restructuring and Other Operating Charges

In fiscal year 2010, we recorded a $6 million charge pursuant to the provisions of an amended Merger Agreement with OMAX, net of a $2.8 million discount on two subordinated notes issued to OMAX in fiscal year 2010.

Also during fiscal year 2010, we recognized $1.0 million in restructuring activities as a result of the global recession in order to improve performance and better position us for existing market conditions and longer-term growth. The restructuring charges recorded in fiscal year 2010 were net of a $0.6 million credit related to the gain recognized on the sale of our building in Hsinchu, Taiwan. There were no further restructuring activities during fiscal years 2011 and 2012, and there are no further planned restructuring activities as of April 30, 2012.

Our restructuring liability was satisfied as of April 30, 2011. The following table summarizes our restructuring and other operating charges, net:



	Fiscal Year Ended April 30,
	2010
Severance and termination benefits	$	1,604
Gain on sale of building	(601		)
Merger termination charge	3,219
	$	4,222

Discontinued Operations

In fiscal year 2009, we were notified by the purchaser of our Avure business (reported as a discontinued operation for the fiscal year ended April 30, 2006), that the Swedish Tax Authority was conducting an audit which included periods when we owned the business. In the sale agreements, we made commitments to indemnify the purchaser for certain claims, including tax matters relating to the periods when we 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, approximately $2.8 million at the initial date of assessment, in additional taxes, penalties and fines. In April 2010, we filed an appeal to contest the Swedish tax authority's assertion. Since the filing of our appeal, there has been further correspondence with the Swedish tax authorities as we continue to contest the findings, and there has been a hearing before the Swedish district court regarding the appeal, but there has been no decision in the matter and we are awaiting this court's decision. A charge was recorded in fiscal year 2010 related to the periods when we owned Avure. This charge 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 Statements of Operations. As of April 30, 2012, we have accrued $1.3 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.

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Results of Operations

(Tabular amounts in thousands)

Summary Consolidated Results



										2012 vs 2011					2011 vs 2010
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2012			2011			2010			$			%		$			%
	(In thousands)
Sales	$	253,768		$	216,524		$	173,749		$	37,244		17	%	$	42,775		25	%
Gross Margin	99,368			84,461			67,767			14,907			18	%	16,694			25	%
Selling, General, and Administrative Expenses	84,699			79,574			70,545			5,125			6	%	9,029			13	%
Restructuring and Other Operating Charges, net	—			—			4,222			—			NM		(4,222		)	(100	)%
Operating Income (Loss)	14,669			4,887			(7,000		)	9,782			NM		11,887			NM

Expressed as a % of Sales:
Gross Margin	39		%	39		%	39		%				—					—
Selling, General, and Administrative Expenses	33		%	37		%	41		%				(400) bpts					(400) bpts
Restructuring and Other Operating Charges, net	—		%	—		%	2		%				NM					(200) bpts
Operating Income (Loss)	6		%	2		%	(4		)%				400 bpts					600 bpts

bpts = basis points
NM = not meaningful

Consolidated Sales by Category
										2012 vs 2011					2011 vs 2010
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2012			2011			2010			$			%		$			%
	(In thousands)
Standard System Sales	$	150,456		$	117,721		$	81,799		$	32,735		28	%	$	35,922		44	%
Advanced System Sales	23,358			28,431			34,333			(5,073		)	(18	)%	(5,902		)	(17	)%
Consumable Parts Sales	79,954			70,372			57,617			9,582			14	%	12,755			22	%
	$	253,768		$	216,524		$	173,749		$	37,244		17	%	$	42,775		25	%

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 Advanced. The Standard segment includes sales and cost of sales related to our cutting and surface preparation 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 projects 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.

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 16 - Business Segments and Geographic Information of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

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Standard Segment



										2012 vs 2011				2011 vs 2010
	Fiscal Year Ended April 30,									Increase (Decrease)				Increase (Decrease)
	2012			2011			2010			$		%		$		%
	(In thousands)
Sales	$	230,272		$	187,887		$	137,514		$	42,385	23	%	$	50,373	37	%
% of total company sales	91		%	87		%	79		%			NM				NM
Gross Margin	93,843			78,321			56,097			15,522		20	%	22,224		40	%
Gross Margin as % of sales	41		%	42		%	41		%			(100) bpts				100 bpts

bpts = basis points
NM = not meaningful

Fiscal year 2012 compared to fiscal year 2011

Sales in our Standard segment increased $42.4 million or 23% over the prior year. Excluding the impact of foreign currency changes, sales in the Standard segment increased $40.5 million or 22% in fiscal year 2012 compared to the prior year.

The year over year increases were primarily driven by the following:


•	Continued double-digit growth in system sales across all geographies on higher system sales volume for an aggregate growth of $32.7 million or 28% over the comparative prior year.


•	Consumable parts sales for this segment also increased by $9.7 million or 14% over the prior comparative year based on higher system utilization by our customers and increased system sales volumes with nearly all geographies reporting double-digit growth over the prior fiscal year.

Gross margin in fiscal year 2012 was $93.8 million or 41% of sales compared to $78.3 million or 42% of sales in the prior year. 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.

Fiscal year 2011 compared to fiscal year 2010

Sales in our Standard segment increased $50.4 million or 37% over 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. These increases were driven by the following:


•	Significant improvements in system sales volume across all geographies as the global economic environment improved and businesses increased capital spending.


•	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.

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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Advanced Segment



										2012 vs 2011					2011 vs 2010
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2012			2011			2010			$			%		$			%
	(In thousands)
Sales	$	23,496		$	28,637		$	36,235		$	(5,141	)	(18	)%	$	(7,598	)	(21	)%
% of total company sales	9		%	13		%	21		%				NM					NM
Gross Margin	5,525			6,140			11,670			(615		)	(10	)%	(5,530		)	(47	)%
Gross Margin as % of sales	24		%	21		%	32		%				300 bpts					(1,100) bpts

bpts = basis points
NM = not meaningful

Fiscal year 2012 compared to fiscal year 2011

Sales in the Advanced segment vary period over period for various reasons, such as the timing of contract awards, timing of project design and manufacturing schedules, the timing of shipments to customers, and timing of installation at customer sites. In fiscal year 2012, sales in our Advanced segment decreased $5.1 million or 18% when compared to the prior fiscal year. This decrease was consistent with our expectations and primarily due to the timing of contract awards, as well as the completion of certain multi-year aerospace systems under contract in fiscal year 2012.

Advanced segment gross margins will vary period over period based on changes in project mix, geographic mix and levels of production. Gross margin in fiscal year 2012 amounted to $5.5 million or 24% of sales compared to $6.1 million or 21% of sales in the prior year. The increase in gross margin as a percentage of sales when compared to the prior year is attributable to changes in project mix as well as adjustments in original estimates related to material and installation costs on certain project contracts in the prior year comparative period.

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 fiscal year 2011, a significant number of these aerospace contracts were in the installation phase.

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, resulting in lower overall margin for the fiscal year ended April 30, 2011.

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Selling, General and Administrative Expenses



							2012 vs 2011				2011 vs 2010
	Fiscal Year Ended April 30,						Increase (Decrease)				Increase (Decrease)
	2012		2011		2010		$		%		$			%
	(In thousands)
Sales and Marketing	$	49,454	$	45,359	$	37,259	$	4,095	9	%	$	8,100		22	%
Research and Engineering	10,863		10,074		8,104		789		8	%	1,970			24	%
General and Administrative	24,382		24,141		25,182		241		1	%	(1,041		)	(4	)%
	$	84,699	$	79,574	$	70,545	$	5,125	6	%	$	9,029		13	%

Fiscal year 2012 compared to fiscal year 2011

Our consolidated selling, general and administrative expenses decreased 400 basis points as a percentage of sales when compared to fiscal year 2011. In total dollars our consolidated selling, general and administrative expenses for the year ended April 30, 2012 increased $5.1 million from fiscal year 2011. The increase in absolute dollars was primarily a result of the following:


•	higher commission expense of $3.2 million due to comparatively higher sales volume and increased sales through our indirect channels;


•	increased labor and compensation related costs of $2.9 million driven by the reinstatement of previously reduced wages and suspended employee benefits, incremental investment in personnel, stock-based compensation and other labor related costs;


•	offset by lower investment of $0.7 million in technology infrastructure and new product development; and


•	other general cost reductions of $0.4 million over the prior fiscal year due in part to the timing of internal projects, and also to management and operational efficiencies.

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.

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Interest Income (Expense), net



										2012 vs 2011					2011 vs 2010
	Fiscal Year Ended April 30,									Increase (Decrease)					Increase (Decrease)
	2012			2011			2010			$			%		$			%
	(In thousands)
Interest Income	$	62		$	106		$	252		$	(44	)	(42	)%	$	(146	)	(58	)%
Interest Expense	(1,112		)	(1,776		)	(2,374		)	(664		)	(37	)%	(598		)	(25	)%
Net Interest Income (Expense)	$	(1,050	)	$	(1,670	)	$	(2,122	)	$	(620	)	(37	)%	$	(452	)	(21	)%

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. Net interest expense was $1.1 million, $1.7 million, and $2.1 million for the respective fiscal years ended April 30, 2012, 2011, and 2010.

For fiscal year 2012 net interest expense decreased $0.6 million primarily due to lower average balances outstanding on our Credit Facility and lower average interest rates. The decrease in net interest expense in fiscal year 2011 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%.

Other Income (Expense), Net



									2012 vs 2011				2011 vs 2010
	Fiscal Year Ended April 30,								Increase (Decrease)				Increase (Decrease)
	2012			2011		2010			$			%	$		%
	(In thousands)
Realized Foreign Exchange Gains (Losses), net	$	(249	)	$	177	$	(1,215	)	$	(426	)	NM	$	1,392	NM
Unrealized Foreign Exchange Gains (Losses), net	(587		)	412		66			(999		)	NM	346		NM
Other	(118		)	97		38			(215		)	NM	59		NM
Other Income (Expense), net	$	(954	)	$	686	$	(1,111	)	$	(1,640	)	NM	$	1,797	NM

NM = not meaningful

During the fiscal year ended April 30, 2012, we recorded net Other Expense of $1.0 million, compared to net Other Income of $0.7 million in the prior fiscal year. The changes in other income and expense during the current fiscal year were primarily related to 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.

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.

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Income Taxes

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



								2012 vs 2011					2011 vs 2010
	Fiscal Year Ended April 30,							Increase (Decrease)					Increase (Decrease)
	2012		2011		2010			$			%		$			%
	(In thousands)
Current Tax Expense (Benefit)	$	1,972	$	1,139	$	1,206		$	833		73	%	$	(67	)	(6	)%
Deferred Tax Expense (Benefit)	1,304		1,756		(4,050		)	(452		)	(26	)%	5,806			NM
Total Tax Expense (Benefit)	$	3,276	$	2,895	$	(2,844	)	$	381		13	%	$	5,739		NM

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, 2012, the recorded amount of our deferred tax assets was $20.8 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, 2012, 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 and Switzerland for which we provide deferred taxes. During fiscal year 2011, we repatriated a total of $1.9 million from one foreign subsidiary that was deemed to be a dividend for tax reporting purposes and in fiscal year 2010 we repatriated a total of $0.2 million, net of tax of less than $0.1 million.

Our effective tax rates for the respective fiscal years ended April 30, 2012, 2011 and 2010 were approximately 26%, 74% and (28)%. Our fiscal year 2012 effective tax rate was lower than the U.S. federal statutory rate primarily as a result from an examination settlement and release of valuation allowances in foreign jurisdictions. Our 2011 effective tax rate was higher than the U.S. federal statutory rate as a result of the repatriation of cash from one foreign subsidiary that was deemed to be a dividend for tax purposes, additional valuation allowances for certain foreign deferred tax assets and uncertain tax benefits. Our 2010 effective tax rate was lower than the U.S. federal statutory rate as a result of foreign earnings taxed at lower rates and nontaxable items.

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 lines of credit. From time to time, we 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, 2012, 2011 and 2010 was $12.7 million, $2.9 million and $3.8 million. Changes in our working capital resulted in a net use of cash of $14.0 million, $14.1 million, and $2.8 million for the respective fiscal years ended April 30, 2012, 2011, and 2010. The changes in working capital are attributable to the timing of inventory purchases and collection of accounts receivable, purchases from vendors, and deferred revenue and customer deposits due to the timing of contract awards and shipments to customers.

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Available Cash and Cash Equivalents

At April 30, 2012 we had total cash and cash equivalents of $12.9 million, of which $7.7 million was held by our foreign subsidiaries. To the extent that our cash needs in the U.S. exceed our cash reserves and availability under our Credit Facility Agreement, we may repatriate cash from certain of our foreign subsidiaries; however, this is not our current intent and 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, 2012, anticipated 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. Cash balances not available for general corporate purposes are classified as restricted cash and are primarily related to cash which collateralizes commercial letters of credit.

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 have a $25.0 million Credit Facility agreement which will mature March 2, 2014. Under the terms of the Credit Facility in effect as of April 30, 2012, we are required to maintain a maximum consolidated leverage ratio of 2.75x, and a minimum fixed charge coverage ratio of 1.75x. The terms of the Credit Facility define the leverage ratio as the ratio of consolidated indebtedness, excluding our outstanding subordinated notes, to consolidated adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") for the most recent four fiscal quarters. The Fixed Charge Coverage Ratio is defined as the ratio of Adjusted EBITDA, less income taxes and maintenance capital expenditures, during the most recent four fiscal quarters to the sum of interest changes 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 0.17 and 95.1, respectively as of the fiscal quarter ended April 30, 2012. 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 Credit Facility covenants 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. In addition, the terms of the Credit Facility limit our ability to pay dividends. We were in compliance with all our financial covenants as of the end of each quarter during the fiscal year ended April 30, 2012.

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. We also pay 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 our leverage ratio.

As of April 30, 2012, we had $21.0 million available under our Credit Facility, net of $4.0 million in outstanding letters of credit. There were no outstanding borrowings against the Credit Facility as of April 30, 2012.

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 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 an amendment to our Credit Facility Agreement or a 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.

We have two unsecured credit facilities in Taiwan and there were no outstanding balances under these credit facilities as of April 30, 2012. The unsecured commitment for the Taiwan credit facilities totaled $3.1 million at April 30, 2012, bearing interest at 2.5% per annum.

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Other Sources of Cash

In fiscal year 2010, we consummated the sale of our building in Hsinchu, Taiwan receiving $4.7 million from the proceeds of the sale, 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 recorded a gain of approximately $0.6 million after paying off an aggregate of $4.1 million related to closing costs, the outstanding balances on the two unsecured credit facilities in Taiwan, and the outstanding mortgage.

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 investments in machinery and equipment to support manufacturing, investments in information technology structure and related projects, the continued implementation of our ERP system, as well as patent and trademark maintenance. It is expected that funds necessary for these expenditures will be generated internally or from available financing. To the extent that sufficient funds cannot be generated through operations or we are unable to obtain financing on reasonable terms, we may reduce our capital expenditures accordingly. Our capital spending for the each of the respective fiscal years ended April 30, 2012, 2011, and 2010 amounted to $4.6 million, $3.5 million, and $10.0 million.

Subordinated Notes

We issued subordinated notes to OMAX with an aggregate value of $10.0 million and a stated interest rate of 2%, which matures in August 2013. We expect to pay the subordinated notes and related interest, aggregating to approximately $10.8 million, from cash generated from our operations or from our existing credit facilities.

Other Strategic Investments

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, amounts previously held in escrow were released to OMAX. In addition, we recorded a $6 million charge pursuant to the provisions of the amended Merger Agreement in fiscal year 2010, net of a $2.8 million discount.

Borrowings and Repayment of Notes Payable and Other Debt

For the respective fiscal years ended April 30, 2012 and 2010 we had net repayments on our Credit Facility of $5.5 million and $12.7 million compared to net borrowings of $5.2 million for the fiscal year ended April 30, 2011. Activity on our Credit Facility will fluctuate to augment our working capital needs. In addition, we also had net borrowings and repayments of long-term obligations and other debt of less than $0.1 million for the respective fiscal years ended April 30, 2012 and 2011 and $5.6 million for the fiscal year ended April 30, 2010.

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Disclosures about Contractual Obligations and Commercial Commitments

The following table summarizes our known future payments pursuant to certain contracts as of April 30, 2012 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.



	Payment by Fiscal Year
	2013		2014		2015		2016		2017		Thereafter		Total
	(In thousands)
Operating Leases	$	2,387	$	2,004	$	1,835	$	1,746	$	1,280	$	2,781	$	12,033
Long-term Debt, Notes Payable & Capital Leases	37		34		16		8		—		—		95
Interest on Long-term Debt and Notes Payable	24		—		—		—		—		—		24
Purchase Commitments (i)	16,645		—		—		—		—		—		16,645
Subordinated Notes (ii)	—		10,824		—		—		—		—		10,824
Liabilities related to Unrecognized Tax benefits, including Interest and Penalties (iii)	—		—		—		—		—		6,766		6,766
Total	$	19,093	$	12,862	$	1,851	$	1,754	$	1,280	$	9,547	$	46,387

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, due August 2013 along with accumulated interest.


iii.	We have unrecognized tax benefits of $6.8 million associated with uncertain tax positions as of April 30, 2012. 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, 2012, we had stand-by letter of credit reimbursement agreements totaling $4.0 million compared to $2.3 million at April 30, 2011. These stand-by 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

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portrayal of our 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.



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 the relative selling price 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, 2012 and 2011. 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.

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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 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, 2012, we had approximately $52.4 million of domestic net operating loss and $35.6 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 $40.1 million. A valuation allowance of $25.0 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 2016 and 2020. 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 $1.3 million, for which we provide a valuation allowance that expires after 2017. 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, 2012, 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 the Standard segment are primarily related to cutting and surface preparation 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. Installation by us is essential to the functionality of waterjet systems sold within the Advanced segment.

We recognize revenue, net of excise and sales taxes, when it is realized or realizable and earned. We consider these criteria met when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured.

We recognize revenue for sales of ultrahigh-pressure waterjet pumps, consumables, and services, and billing for freight charges, in accordance with Accounting Standard Codification ("ASC") 605, Revenue Recognition, (“ASC 605”), when the customer has assumed risk of loss of the goods sold and all performance obligations are complete, or over the period as services are rendered.

We recognize revenue for our Standard segment waterjet systems which do not require significant modification or customization in accordance with ASC 605-25, Multiple-Element Arrangements. Standard segment waterjet systems contain two separate deliverables consisting of the system and installation services. The deliverables are treated as separate units of accounting. Standard segment waterjet systems also include a proprietary software component which functions together with the hardware to deliver the systems' essential functionality. We perform an analysis to determine the relative selling price of each unit of accounting, and we have established vendor-specific objective evidence ("VSOE") for our system hardware and installation services based on standalone transactions.

We allocate consideration to our deliverables at the inception of an arrangement based on their relative selling price, and the applicable revenue recognition criteria are applied to each of the separate units of accounting. In instances where we have not established VSOE for our Standard segment waterjet deliverables, we will use the estimated selling price in accordance with the selling price hierarchy to allocate arrangement consideration to each unit of accounting until such time that VSOE exists. Estimated selling prices would be determined by considering multiple factors, which may include existing and forecasted market conditions, internal costs, gross margin objectives, prior pricing practices, and geographic market strategies. We use estimated selling prices in the absence of VSOE since we are unable to establish comparable third-party evidence of selling price for our deliverables based on limited availability of information and the level of customization and differentiation of similar products. Furthermore, we are unable to reliably determine what similar competitor product selling prices are on a standalone basis.

In general, sales of the 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.

Deferred 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.

For complex aerospace and application systems designed and manufactured to buyers' specification, we recognize revenue using the percentage of completion method in accordance with ASC 605-35, Construction-Type and Production-Type Contracts. Typical lead times can range from 12 to 24 months. 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). We review 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. If the contract is projected to generate a loss, the entire estimated loss is recognized in the period such loss first becomes known. 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. Adjustments to original cost 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

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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 we believe 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.

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, 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.

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Interest Rate Risk

We are subject to fluctuations in interest rates through our issuance of variable rate debt, which includes borrowings against our Credit Facility and outstanding stand-by letters of credit. We did not have any borrowings outstanding on our Credit Facility as of April 30, 2012, and interest charged on outstanding stand-by letters of credit was not material for any of the fiscal years presented.

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. Approximately 59% of our total consolidated sales related to operations outside the United States. Based on our results for the year ended April 30, 2012 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 $7.2 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, 2012 and 2011	38
Consolidated Statements of Operations for the fiscal years ended April 30, 2012, 2011, and 2010	39
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended April 30, 2012, 2011, and 2010	40
Consolidated Statements of Cash Flows for the fiscal years ended April 30, 2012, 2011, and 2010	41
Consolidated Statements of Shareholders' Equity for the fiscal years ended April 30, 2012, 2011, and 2010	43
Notes to Consolidated Financial Statements	44
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts	66

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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, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended April 30, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2012, 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, presents 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, 2012, 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 27, 2012, expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Seattle, Washington

June 27, 2012

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

	April 30,
	2012			2011
ASSETS
Current Assets:
Cash and Cash Equivalents	$	12,942		$	9,096
Restricted Cash	1,435			1,766
Receivables, net	46,830			47,082
Inventories, net	40,069			28,609
Other Current Assets	14,269			11,539
Total Current Assets	115,545			98,092
Property and Equipment, net	17,488			19,104
Intangible Assets, net	4,936			4,738
Deferred Income Taxes, net	23,304			25,171
Other Long-Term Assets	5,793			5,958
Total Assets	$	167,066		$	153,063

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Notes Payable	$	—		$	5,500
Current Portion of Long-Term Obligations	21			25
Accounts Payable	22,577			17,363
Accrued Payroll and Related Liabilities	7,774			7,080
Taxes Payable and Other Accrued Taxes	3,735			2,378
Deferred Revenue and Customer Deposits	13,910			13,317
Other Accrued Liabilities	11,083			11,298
Total Current Liabilities	59,100			56,961
Deferred Income Taxes	5,777			5,711
Subordinated Notes	9,587			8,723
Other Long-Term Liabilities	1,554			2,214
Total Liabilities	76,018			73,609

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; 47,891 and 47,378 shares issued and outstanding	474			469
Capital in Excess of Par	164,882			161,741
Accumulated Deficit	(69,672		)	(79,121		)
Accumulated Other Comprehensive Loss:
Defined Benefit Plan Obligation, net of income tax	(81		)	(68		)
Cumulative Translation Adjustment, net of income tax	(4,555		)	(3,567		)
Total Shareholders’ Equity	91,048			79,454
Total Liabilities and Shareholders’ Equity	$	167,066		$	153,063
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,
	2012			2011			2010
Sales	$	253,768		$	216,524		$	173,749
Cost of Sales	154,400			132,063			105,982
Gross Margin	99,368			84,461			67,767
Operating Expenses:
Sales and Marketing	49,454			45,359			37,259
Research and Engineering	10,863			10,074			8,104
General and Administrative	24,382			24,141			25,182
Restructuring and Other Operating Charges, net	—			—			4,222
Total Operating Expenses	84,699			79,574			74,767
Operating Income (Loss)	14,669			4,887			(7,000		)
Interest Income	62			106			252
Interest Expense	(1,112		)	(1,776		)	(2,374		)
Other Income (Expense), net	(954		)	686			(1,111		)
Income (Loss) Before Taxes	12,665			3,903			(10,233		)
(Provision) Benefit for Income Taxes	(3,276		)	(2,895		)	2,844
Income (Loss) from Continuing Operations	9,389			1,008			(7,389		)
Income (Loss) from Discontinued Operations, net of Income Tax of $0, $0, and $0	60			(242		)	(1,095		)
Net Income (Loss)	$	9,449		$	766		$	(8,484	)
Basic and Diluted Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.20		$	0.02		$	(0.17	)
Discontinued Operations	—			—			(0.02		)
Net Income (Loss)	$	0.20		$	0.02