##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended October 31, 2007
 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 0-12448
 
 FLOW INTERNATIONAL CORPORATION
 
 WASHINGTON
(State or other jurisdiction of 
incorporation or organization)
    
    91-1104842
(I.R.S. Employer
Identification No.)
 23500  64th Avenue South
Kent, Washington 98032
(253) 850-3500
 
 þ  ̈
 o þ o
 o þ




---



##### 



FLOW INTERNATIONAL CORPORATION
  PagePart I  FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets  October 31, 2007
and April 30, 2007
    
    
    3Condensed Consolidated Statements of Operations  Three
and Six Months Ended October 31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows  Six
Months Ended October 31, 2007 and 2006
    
    
    5Condensed Consolidated Statement of Shareholders Equity
and Comprehensive Income  Six Months Ended October 31,
2007 and 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27Part II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    30Signatures
    
    
    31EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 
 October 31,
    
    
    April 30,2007
    
    
    2007ASSETS:Current Assets:Cash and Cash Equivalents
    
    $
    26,928
    
    
    $
    38,146Short-term Investments
    
    
    
    
    
    
    750Receivables, net
    
    
    28,699
    
    
    
    26,618Inventories
    
    
    30,988
    
    
    
    26,635Deferred Income Taxes
    
    
    1,243
    
    
    
    44Other Current Assets
    
    
    7,440
    
    
    
    6,950Total Current Assets
    
    
    95,298
    
    
    
    99,143Property and Equipment, net
    
    
    17,716
    
    
    
    15,479Intangible Assets, net
    
    
    3,861
    
    
    
    3,767Goodwill
    
    
    2,764
    
    
    
    2,764Deferred Income Taxes
    
    
    256
    
    
    
    305Other Assets
    
    
    385
    
    
    
    682$
    120,280
    
    
    $
    122,140LIABILITIES AND SHAREHOLDERS EQUITY:Current Liabilities:Notes Payable
    
    $
    1,049
    
    
    $
    6,366Current Portion of Long-Term Obligations
    
    
    837
    
    
    
    822Accounts Payable
    
    
    18,166
    
    
    
    17,545Accrued Payroll and Related Liabilities
    
    
    7,276
    
    
    
    6,291Taxes Payable and Other Accrued Taxes
    
    
    2,644
    
    
    
    2,066Deferred Income Taxes
    
    
    260
    
    
    
    1,627Deferred Revenue
    
    
    4,943
    
    
    
    3,559Customer Deposits
    
    
    4,926
    
    
    
    6,499Other Accrued Liabilities
    
    
    13,000
    
    
    
    12,233Total Current Liabilities
    
    
    53,101
    
    
    
    57,008Long-Term Obligations, net
    
    
    2,459
    
    
    
    2,779Other Long-Term Liabilities
    
    
    1,175
    
    
    
    57356,735
    
    
    
    60,360Commitments and Contingencies (Note 14)Shareholders Equity:Series A 8% Convertible Preferred Stock$.01 par value, 1,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common Stock$.01 par value, 49,000,000 shares authorized, 37,328,946 and
37,268,037 shares issued and outstanding at October 31, 2007 and April 30,
2007, respectively
    
    
    368
    
    
    
    367Capital in Excess of Par
    
    
    137,274
    
    
    
    139,115Accumulated Deficit
    
    
    (66,617
    )
    
    
    (68,747
    )Accumulated Other Comprehensive Loss:Defined Benefit Plan Obligation, net of income tax of $67 and $67
    
    
    (201
    )
    
    
    (201
    )Cumulative Translation Adjustment, net of income tax of $221 and $0
    
    
    (7,279
    )
    
    
    (8,754
    )Total Shareholders Equity
    
    
    63,545
    
    
    
    61,780$
    120,280
    
    
    $
    122,140
 
 3




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    $
    59,174
    
    
    $
    54,404
    
    
    $
    117,840
    
    
    $
    107,814Cost of Sales
    
    
    34,739
    
    
    
    30,792
    
    
    
    69,805
    
    
    
    61,171Gross Margin
    
    
    24,435
    
    
    
    23,612
    
    
    
    48,035
    
    
    
    46,643Expenses:Sales and Marketing
    
    
    10,983
    
    
    
    10,563
    
    
    
    21,440
    
    
    
    20,160Research and Engineering
    
    
    2,145
    
    
    
    2,339
    
    
    
    4,425
    
    
    
    4,633General and Administrative
    
    
    7,275
    
    
    
    8,982
    
    
    
    19,691
    
    
    
    16,00220,403
    
    
    
    21,884
    
    
    
    45,556
    
    
    
    40,795Operating Income
    
    
    4,032
    
    
    
    1,728
    
    
    
    2,479
    
    
    
    5,848Interest Income
    
    
    251
    
    
    
    153
    
    
    
    442
    
    
    
    382Interest Expense
    
    
    (95
    )
    
    
    (46
    )
    
    
    (177
    )
    
    
    (181
    )Other Income (Expense), Net
    
    
    (579
    )
    
    
    399
    
    
    
    (267
    )
    
    
    1,025Income Before Provision for Income Taxes
    
    
    3,609
    
    
    
    2,234
    
    
    
    2,477
    
    
    
    7,074Provision/Benefit for Income Taxes
    
    
    (1,314
    )
    
    
    (492
    )
    
    
    196
    
    
    
    (1,564
    )Income From Continuing Operations
    
    
    2,295
    
    
    
    1,742
    
    
    
    2,673
    
    
    
    5,510Loss on Sale of Discontinued Operations, Net of Income Tax of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (726
    )Net Income
    
    $
    2,295
    
    
    $
    1,742
    
    
    $
    2,673
    
    
    $
    4,784Basic Income Per Share:Income From Continuing Operations
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.15Loss From Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net Income
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.13Diluted Income Per Share:Income From Continuing Operations
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.15Loss From Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net Income
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.13Weighted Average Shares Used in Computing Basic and
Diluted Income (Loss) Per Share:Basic
    
    
    37,326
    
    
    
    37,194
    
    
    
    37,314
    
    
    
    37,134Diluted
    
    
    37,511
    
    
    
    37,879
    
    
    
    37,540
    
    
    
    37,887
 
 4




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 Six Months EndedOctober 31,2007
    
    
    2006Cash Flows from Operating Activities:Net Income
    
    $
    2,673
    
    
    $
    4,784Adjustments to Reconcile Net Income to Cash Used in Operating Activities:Depreciation and Amortization
    
    
    1,780
    
    
    
    1,413Unrealized Foreign Currency (Gains), net
    
    
    (905
    )
    
    
    (1,690
    )Incentive Stock Compensation Expense
    
    
    1,101
    
    
    
    1,405Repurchase of Warrants
    
    
    629
    
    
    
    Loss on Sale of Discontinued Operations
    
    
    
    
    
    
    726Deferred Income Taxes
    
    
    (1,618
    )
    
    
    330Other
    
    
    892
    
    
    
    403Changes in Operating Assets and Liabilities:Receivables
    
    
    (1,172
    )
    
    
    6,180Inventories
    
    
    (3,804
    )
    
    
    (5,737
    )Prepaid Expenses
    
    
    500
    
    
    
    1,321Other Operating Assets
    
    
    (255
    )
    
    
    236Accounts Payable
    
    
    (848
    )
    
    
    (5,573
    )Deferred Revenue
    
    
    1,216
    
    
    
    (3,661
    )Customer Deposits
    
    
    (1,788
    )
    
    
    (2,175
    )Other Operating Liabilities
    
    
    (104
    )
    
    
    (1,427
    )Cash Used in Operating Activities
    
    
    (1,703
    )
    
    
    (3,465
    )Cash Flows From Investing Activities:Expenditures for Property and Equipment and Intangible Assets
    
    
    (2,541
    )
    
    
    (2,561
    )Proceeds from Sale of Short-term Investments
    
    
    650
    
    
    
    Proceeds from Sale of Property and Equipment
    
    
    219
    
    
    
    Proceeds from Sale of Avure Business
    
    
    
    
    
    
    990Settlement on Sale of Avure Business
    
    
    
    
    
    
    (985
    )Restricted Cash
    
    
    
    
    
    
    (125
    )Cash Used in Investing Activities
    
    
    (1,672
    )
    
    
    (2,681
    )Cash Flows from Financing Activities:Repayments Under Notes Payable
    
    
    (5,857
    )
    
    
    (1
    )Borrowings Under Notes Payable
    
    
    457
    
    
    
    Payments of Long-Term Obligations
    
    
    (391
    )
    
    
    (499
    )Proceeds from Exercise of Stock Options
    
    
    424
    
    
    
    2,498Payment for Warrant Repurchase
    
    
    (3,006
    )
    
    
    Cash Provided by (Used in) Financing Activities
    
    
    (8,373
    )
    
    
    1,998Effect of Changes in Exchange Rates
    
    
    530
    
    
    
    610Decrease in Cash And Cash Equivalents
    
    
    (11,218
    )
    
    
    (3,538
    )Cash and Cash Equivalents at Beginning of Period
    
    
    38,146
    
    
    
    36,186Cash and Cash Equivalents at End of Period
    
    $
    26,928
    
    
    $
    32,648Supplemental Disclosures of Noncash Investing and Financing ActivitiesOperating Assets transferred to Property and Equipment
    
    $
    417
    
    
    $
    Accounts Payable incurred to acquire Property and Equipment, and Intangible Assets
    
    
    1,208
    
    
    
    871Non-monetary exchange of assets
    
    
    
    
    
    
    250Issuance of compensatory common stock on executive incentive compensation plan
    
    
    
    
    
    
    884
 
 5




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 AccumulatedCommon Stock
    
    
    Capital
    
    
    
    
    
    
    Other
    
    
    TotalPar
    
    
    In Excess
    
    
    Accumulated
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Value
    
    
    of Par
    
    
    Deficit
    
    
    Loss
    
    
    EquityBalances, April 30, 2007
    
    
    37,268
    
    
    $
    367
    
    
    $
    139,115
    
    
    $
    (68,747
    )
    
    $
    (8,955
    )
    
    $
    61,780Components of Comprehensive
Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,673
    
    
    
    
    
    
    
    2,673Cumulative Translation
Adjustment, Net of
Income Tax of $288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,475
    
    
    
    1,475Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,148Cumulative effect upon adoption
of FIN 48 (Note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (543
    )
    
    
    
    
    
    
    (543
    )Exercise of Options
    
    
    41
    
    
    
    1
    
    
    
    423
    
    
    
    
    
    
    
    
    
    
    
    424Repurchase of Warrants (Note 15)
    
    
    
    
    
    
    
    
    
    
    (2,377
    )
    
    
    
    
    
    
    
    
    
    
    (2,377
    )Stock Compensation
    
    
    20
    
    
    
    0
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    113Balances, October 31, 2007
    
    
    37,329
    
    
    $
    368
    
    
    $
    137,274
    
    
    $
    (66,617
    )
    
    $
    (7,480
    )
    
    $
    63,545Balances, April 30, 2006
    
    
    36,943
    
    
    $
    364
    
    
    $
    137,192
    
    
    $
    (72,417
    )
    
    $
    (7,999
    )
    
    $
    57,140Cumulative effect of the
adoption of FAS 123R
    
    
    
    
    
    
    
    
    
    
    (313
    )
    
    
    
    
    
    
    
    
    
    
    (313
    )Components of
Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,784
    
    
    
    
    
    
    
    4,784Reclassification
Adjustment for
Settlement of
Cash Flow Hedges,
net of income tax
of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273
    
    
    
    273Cumulative
Translation
Adjustment, Net
of Income Tax of
$0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,184
    )
    
    
    (1,184
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,873Exercise of Options
    
    
    151
    
    
    
    2
    
    
    
    1,410
    
    
    
    
    
    
    
    
    
    
    
    1,412Stock Compensation
    
    
    131
    
    
    
    1
    
    
    
    1,822
    
    
    
    
    
    
    
    
    
    
    
    1,823Balances,
October 31, 2006
    
    
    37,225
    
    
    $
    367
    
    
    $
    140,111
    
    
    $
    (67,633
    )
    
    $
    (8,910
    )
    
    $
    63,935
 
 6




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 Note 1  Basis of Presentation
  Note 2  Recently Issued Accounting Pronouncements
    Note 3  Segment Information
  7




---



##### Table of Contents



North
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Inter-America
    
    
    Asia
    
    
    International
    
    
    
    
    
    
    segmentWaterjet
    
    
    Waterjet
    
    
    Waterjet
    
    
    Applications
    
    
    Eliminations
    
    
    TotalThree Months Ended October 31,
2007External sales
    
    $
    32,276
    
    
    $
    5,721
    
    
    $
    16,083
    
    
    $
    5,094
    
    
    $
    
    
    
    $
    59,174Inter-segment sales
    
    
    14,705
    
    
    
    259
    
    
    
    849
    
    
    
    233
    
    
    
    (16,046
    )
    
    
    Gross margin **
    
    
    14,567
    
    
    
    2,654
    
    
    
    7,182
    
    
    
    463
    
    
    
    (431
    )
    
    
    24,435Operating income (loss) *
    
    
    1,752
    
    
    
    111
    
    
    
    2,848
    
    
    
    (1,110
    )
    
    
    431
    
    
    
    4,032Six Months Ended October 31, 2007External sales
    
    $
    63,334
    
    
    $
    12,748
    
    
    $
    31,393
    
    
    $
    10,365
    
    
    $
    
    
    
    $
    117,840Inter-segment sales
    
    
    31,416
    
    
    
    854
    
    
    
    1,735
    
    
    
    590
    
    
    
    (34,595
    )
    
    
    Gross margin **
    
    
    27,978
    
    
    
    5,826
    
    
    
    13,555
    
    
    
    1,274
    
    
    
    (598
    )
    
    
    48,035Operating income (loss) *
    
    
    (1,937
    )
    
    
    597
    
    
    
    4,764
    
    
    
    (1,543
    )
    
    
    598
    
    
    
    2,479Three Months Ended October 31,
2006External sales
    
    $
    30,079
    
    
    $
    8,133
    
    
    $
    11,943
    
    
    $
    4,249
    
    
    $
    
    
    
    $
    54,404Inter-segment sales
    
    
    6,028
    
    
    
    337
    
    
    
    26
    
    
    
    168
    
    
    
    (6,559
    )
    
    
    Gross margin
    
    
    13,800
    
    
    
    4,472
    
    
    
    4,807
    
    
    
    533
    
    
    
    
    
    
    
    23,612Operating income (loss) *
    
    
    796
    
    
    
    388
    
    
    
    998
    
    
    
    (454
    )
    
    
    
    
    
    
    1,728Six Months Ended October 31, 2006External sales
    
    $
    61,588
    
    
    $
    15,489
    
    
    $
    22,584
    
    
    $
    8,153
    
    
    $
    
    
    
    $
    107,814Inter-segment sales
    
    
    11,421
    
    
    
    644
    
    
    
    71
    
    
    
    184
    
    
    
    (12,320
    )
    
    
    Gross margin
    
    
    28,132
    
    
    
    8,938
    
    
    
    8,796
    
    
    
    979
    
    
    
    (202
    )
    
    
    46,643Operating income (loss) *
    
    
    3,573
    
    
    
    2,395
    
    
    
    1,298
    
    
    
    (1,216
    )
    
    
    (202
    )
    
    
    5,848
 
 *
    
    The three and six months ended October 31, 2007 include the allocation of corporate
management fees in total of $1.2 million and $2.4 million, respectively from North America
Waterjet to the Companys other operating segments which is part of the reports evaluated by
the chief operating decision maker. Prior periods have been recast to reflect this
methodology.**
    
    Effective August 1, 2007, the Company updated its intercompany transfer pricing policy. The
intercompany transfer pricing changes have no effect on our consolidated operating results.  8




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating income for reportable segments
    
    $
    4,032
    
    
    $
    1,728
    
    
    $
    2,479
    
    
    $
    5,848Interest income
    
    
    251
    
    
    
    153
    
    
    
    442
    
    
    
    382Interest expense
    
    
    (95
    )
    
    
    (46
    )
    
    
    (177
    )
    
    
    (181
    )Other income (expense), net
    
    
    (579
    )
    
    
    399
    
    
    
    (267
    )
    
    
    1,025Income before provision for income taxes
    
    $
    3,609
    
    
    $
    2,234
    
    
    $
    2,477
    
    
    $
    7,074
 Note 4Stock-Based Compensation Plans
  2005 Equity Incentive Plan (the 2005 Plan).
  Stock Options
   Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    Aggregate
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Intrinsic
    
    
    RemainingOptions
    
    
    Price
    
    
    Value
    
    
    Contractual Term (Years)Outstanding at April 30, 2007
    
    
    1,063,404
    
    
    $
    8.99
    
    
    $
    2,819,601
    
    
    
    3.61Granted during the period
    
    
    200,000
    
    
    
    11.40Exercised during the period
    
    
    (41,200
    )
    
    
    10.27Expired or forfeited during the period
    
    
    (149,850
    )
    
    
    10.54Outstanding at October 31, 2007
    
    
    1,072,354
    
    
    $
    9.17
    
    
    $
    1,034,711
    
    
    
    4.46Exercisable at October 31, 2007
    
    
    872,354
    
    
    $
    8.66
    
    
    $
    1,034,711
    
    
    
    3.25Vested or expected to vest at October 31, 2007
    
    
    872,354
    
    
    
    8.66
    
    
    
    1,034,711
    
    
    
    3.25
 9




---



##### Table of Contents



Six Months Ended October 31,2007
    
    2006Weighted average grant-date fair value of stock options granted
    
    $
    6.90
    
    
    $
    4.76Total intrinsic value of options exercised
    
    $
    105
    
    
    $
    674Total fair value of options vested
    
    $
    
    
    
    $
    55Cash received from exercise of share options
    
    $
    424
    
    
    $
    1,412Tax benefit realized from stock options exercised
    
    $
    
    
    
    $
    
   Service-Based Stock Awards
   Six Months Ended October 31, 2007Weighted-AverageNumber of
    
    
    Grant-date FairShares
    
    
    ValueNonvested at April 30, 2007
    
    
    72,533
    
    
    $
    9.33Granted during the period
    
    
    16,000
    
    
    
    12.72Forfeited during the period
    
    
    (5,600
    )
    
    
    12.99Vested during the period
    
    
    (26,434
    )
    
    
    6.81Nonvested at October 31, 2007
    
    
    56,499
    
    
    $
    10.94
  Performance-Based Stock Awards
  10




---



##### Table of Contents



Six Months ended October 31, 2007Weighted-AverageNumber of
    
    
    Grant-date FairShares
    
    
    ValueNonvested at April 30, 2007
    
    
    181,500
    
    
    $
    10.71Granted during the period
    
    
    
    
    
    
    Forfeited during the period
    
    
    (38,000
    )
    
    
    10.51Vested during the period
    
    
    
    
    
    
    Nonvested at October 31, 2007
    
    
    143,500
    
    
    $
    10.76
   Note 5  Restructuring
   North
    
    
    OtherAmerica Waterjet
    
    
    International Waterjet
    
    
    Applications
    
    
    ConsolidatedBalance, April 30, 2007
    
    $
    31
    
    
    $
    136
    
    
    $
    320
    
    
    $
    487Cash payments
    
    
    (18
    )
    
    
    (8
    )
    
    
    (242
    )
    
    
    (268
    )Other
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    38Balance, October 31, 2007
    
    $
    13
    
    
    $
    166
    
    
    $
    78
    
    
    $
    257
 Note 6Other Income (Expense), Net
   11




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded October 31,
    
    
    Ended October 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Realized Foreign Exchange Losses, Net
    
    $
    (423
    )
    
    $
    (382
    )
    
    $
    (481
    )
    
    $
    (343
    )Unrealized Foreign Exchange Gains, Net
    
    
    528
    
    
    
    848
    
    
    
    905
    
    
    
    1,690Premium on Repurchase of Warrants
    
    
    (629
    )
    
    
    
    
    
    
    (629
    )
    
    
    Hedging Costs
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    (206
    )Other
    
    
    (55
    )
    
    
    (21
    )
    
    
    (62
    )
    
    
    (116
    )$
    (579
    )
    
    $
    399
    
    
    $
    (267
    )
    
    $
    1,025
   Note 7  Income Taxes
    ,
 12




---



##### Table of Contents



Note 8Discontinued Operations
     Note 9Basic and Diluted Income per Share
   Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Income from continuing operations
    
    $
    2,295
    
    
    $
    1,742
    
    
    $
    2,673
    
    
    $
    5,510Denominator:Denominator for basic income (loss) per shareweighted
average shares outstanding
    
    
    37,326
    
    
    
    37,194
    
    
    
    37,314
    
    
    
    37,134Dilutive potential common shares from employee stock options
    
    
    128
    
    
    
    336
    
    
    
    169
    
    
    
    398Dilutive potential common shares from warrants
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    281Dilutive potential common shares from service and
performance based stock awards
    
    
    57
    
    
    
    74
    
    
    
    57
    
    
    
    74Denominator for diluted incomeweighted average shares
outstanding and assumed conversions
    
    
    37,511
    
    
    
    37,879
    
    
    
    37,540
    
    
    
    37,887Basic and diluted income (loss) from continuing operations per share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.15
 13




---



##### Table of Contents



Note 10  Receivables, Net
  October 31, 2007
    
    
    April 30, 2007Trade Accounts Receivable
    
    $
    28,910
    
    
    $
    27,573Unbilled Revenues
    
    
    3,198
    
    
    
    1,92932,108
    
    
    
    29,502Less: Allowance for Doubtful Accounts
    
    
    3,409
    
    
    
    2,884$
    28,699
    
    
    $
    26,618
 Note 11  Inventories
  October 31, 2007
    
    
    April 30, 2007Raw Materials and Parts
    
    $
    20,023
    
    
    $
    15,610Work in Process
    
    
    3,057
    
    
    
    2,765Finished Goods
    
    
    7,908
    
    
    
    8,260$
    30,988
    
    
    $
    26,635
 Note 12  Warranty Obligations
   Accrued warranty balance as of April 30, 2007
    
    $
    2,405Accruals for warranties
    
    
    1,762Warranty costs incurred
    
    
    (1,409
    )Accrued warranty balance as of October 31, 2007
    
    $
    2,758
 Note 13  Long-Term Obligations and Notes Payable
  October 31, 2007
    
    
    April 30, 2007Term Loans Payable
    
    $
    3,296
    
    
    $
    3,601Less Current Portion
    
    
    (837
    )
    
    
    (822
    )$
    2,459
    
    
    $
    2,779Notes Payable
    
    $
    1,049
    
    
    $
    6,366
 14




---



##### Table of Contents



Note 14  Commitments and Contingencies
  Omax
Corporation v. Flow International Corporation
  15




---



##### Table of Contents



Other Legal Proceedings
 Other Commitments
   Note 15Warrant Repurchase
   16




---



##### Table of Contents



Note 16  Subsequent Events
     
    
    At Closing, $66,000,000 plus the funds in the Option Escrow to be paid in cash, minus
amounts to be paid by the Company at Closing in satisfaction of certain litigation fees of
Omax, if any, and less amounts to be placed into an employee retention pool, described
below;
    
    At Closing, 3.75 million shares of Company common stock, or if the Closing Share Price
(defined as the average daily closing price of the Company common stock during the ten
trading day period prior to Closing) is less than $9.00, such greater number as is
necessary so that the total value of the shares delivered is $33.75 million (the Company
may pay cash for any additional shares otherwise payable pursuant this paragraph, based on
the number of additional shares (in excess of 3,750,000) which would otherwise be payable
times the Closing Share Price); and
    
    Two years after Closing, up to 1,733,334 additional shares of common stock based on the
Average Share Price (defined as the average closing price for the six months ending twenty
four months after Closing). Shares will be paid on a straight line interpolation, with no
shares being delivered if the Average Share Price is $13 or less, and 1,733,334 shares
being delivered if the Average Share Price is $15 or more; provided that if the Closing
Share Price is less than $9.00, the $13 and $15 prices will be reduced by the difference
between $9.00 and the Closing Share Price. The Company may elect to pay the consideration
required in this paragraph in cash based upon the Average Share Price times the number of
shares which would otherwise be issued.
    
    The cash consideration at Closing is subject to adjustment based on Omax Net Working
Capital at Closing. The consideration will be adjusted upward or downward on a
dollar-for-dollar basis if the Net Working Capital is below $7 million or above $9 million.
 Omax Corporation v Flow International
Corporation
  
    
    provide for two separate indemnification escrows in an aggregate amount of $13.2 million
to be funded at Closing from the cash consideration. $7 million will be subject to a
General Escrow that will end July 31, 2009, to indemnify the Company for losses from
breaches of representations and warranties to the extent that such breach or breaches,
individually or in the aggregate, result in claims in excess of $1,000,000. $6.2 million
will be subject to a
 17




---



##### Table of Contents



Special Escrow that will end two years after Closing, to indemnify the Company for losses
with respect to certain potential liabilities identified during the course of due diligence.
The amount to be placed in the Special Escrow is subject to reduction under conditions to
be specified in the Definitive Agreements. The General and Special Escrows will be funded
proportionally from the cash payments (including the funds in the Option Escrow) and the
shares of common stock delivered at Closing;
    
    provide that at Closing the Company will place into escrow a portion of the cash
consideration as a retention pool for key Omax employees that will provide such employees
the equivalent of three months salary, to be allocated upon the six month anniversary of
Closing;
    
    include mutually acceptable executive officer agreements for Drs. John B. Cheung, John
H. Olsen and Mr. James M. OConnor to become executives of the Company and provide that as
soon as is commercially reasonable following Closing, the Company will expand its Board of
Directors and elect Dr. Cheung to the vacancy thereby created; and
    
    provide that Omax stock options that are currently outstanding and unvested shall vest
immediately prior to Closing and shall be exercised or terminated at Closing, or otherwise
treated in a manner mutually acceptable to the parties.
    18




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 SAFE HARBOR STATEMENT:
 Statements made in this quarterly report on Form 10-Q that are not historical facts are
forward-looking statements that involve risks and uncertainties. Forward-looking statements
typically are identified by the use of such terms as may, will, expect, believe,
anticipate, estimate, plan and similar words, although some forward-looking statements are
expressed differently. You should be aware that our actual results could differ materially from
those contained in any forward-looking statement due to a number of factors, which include, but are
not limited to the following: the special risk factors and uncertainties set forth in Part I, Item
1A of our Annual Report on Form 10-K for the year ended April 30, 2007; our expectation of improved
Aerospace revenue levels because of increased orders for large systems; our expectation of improved
operating leverage in future quarters as a result of initiatives streamline the organizational
structure of our Company; our expectation that the extended credit line will provide us with
liquidity that could be used to make acquisitions, fund the repurchase of shares, or pay dividends;
our belief that the financial covenants in our credit facilities are achievable based on current
financial forecasts and our belief that our existing cash, cash from operations, and credit
facilities at October 31, 2007 are adequate to fund our operations for the next twelve months; our
plan to continue capital spending on information technology and facilities and our expectation that
the necessary funds will be generated internally; our intent to contest Omaxs allegations and our
belief that we will continue to spend considerable amounts on this contest; our belief that
waterjets are experiencing growing acceptance in the marketplace because of their flexibility and
superior machine performance; our continuing to invest in marketing and new direct sales and
technical services staff adding new personnel to service potential and existing customers along
with the increasing adoption of waterjet technology to drive revenue growth over the next few
years; our belief that the improvements made in the Asia Waterjet management team will return the
segment to growth; our plan to continue to repatriate earnings in the future; our belief that for
matters other than Omax and Collins and Aikman, these proceedings will not have a material adverse
effect on our consolidated financial position, results of operations or cash flows; our expectation
that unrecognized tax benefits will not change significantly within the next twelve months.
 Additional information on these and other factors that could affect our financial results is
set forth below. Finally, 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.
 Results of Operations
 (Tabular amounts in thousands)
 Sales
 Three Months Ended October 31,
    
    
    Six Months Ended October 31,2007
    
    
    2006
    
    
    Difference
    
    
    %
    
    2007
    
    
    2006
    
    
    Difference
    
    
    %SalesNorth
America
Waterjet
    
    $
    32,276
    
    
    $
    30,079
    
    
    $
    2,197
    
    
    
    7
    %
    
    $
    63,334
    
    
    $
    61,588
    
    
    $
    1,746
    
    
    
    3
    %Asia Waterjet
    
    
    5,721
    
    
    
    8,133
    
    
    
    (2,412
    )
    
    
    (30
    )%
    
    
    12,748
    
    
    
    15,489
    
    
    
    (2,741
    )
    
    
    (18
    )%Other
International
Waterjet
    
    
    16,083
    
    
    
    11,943
    
    
    
    4,140
    
    
    
    35
    %
    
    
    31,393
    
    
    
    22,584
    
    
    
    8,809
    
    
    
    39
    %Applications
    
    
    5,094
    
    
    
    4,249
    
    
    
    845
    
    
    
    20
    %
    
    
    10,365
    
    
    
    8,153
    
    
    
    2,212
    
    
    
    27
    %Total
    
    $
    59,174
    
    
    $
    54,404
    
    
    $
    4,770
    
    
    
    9
    %
    
    $
    117,840
    
    
    $
    107,814
    
    
    $
    10,026
    
    
    
    9
    %
  19




---



##### Table of Contents



Systems vs. Spares.
 Three Months Ended October 31,
    
    
    Six Months Ended October 31,2007
    
    
    2006
    
    
    Difference
    
    
    %
    
    
    2007
    
    
    2006
    
    
    Difference
    
    
    %SalesSystems
    
    $
    42,386
    
    
    $
    39,703
    
    
    $
    2,683
    
    
    
    7
    %
    
    $
    85,069
    
    
    $
    79,048
    
    
    $
    6,021
    
    
    
    8
    %Consumable parts
    
    
    16,788
    
    
    
    14,701
    
    
    
    2,087
    
    
    
    14
    %
    
    
    32,771
    
    
    
    28,766
    
    
    
    4,005
    
    
    
    14
    %Total
    
    $
    59,174
    
    
    $
    54,404
    
    
    $
    4,770
    
    
    
    9
    %
    
    $
    117,840
    
    
    $
    107,814
    
    
    $
    10,026
    
    
    
    9
    %
  20




---



##### Table of Contents



Gross Margins.
 Three Months Ended October 31,
    
    
    Six Months Ended October 31,2007
    
    
    2006
    
    
    Difference
    
    
    %
    
    
    2007
    
    
    2006
    
    
    Difference
    
    
    %Gross MarginNorth America Waterjet
    
    $
    14,136
    
    
    $
    13,800
    
    
    $
    336
    
    
    
    2
    %
    
    $
    27,380
    
    
    $
    27,930
    
    
    $
    (550
    )
    
    
    (2
    )%Asia Waterjet
    
    
    2,654
    
    
    
    4,472
    
    
    
    (1,818
    )
    
    
    (41
    )%
    
    
    5,826
    
    
    
    8,938
    
    
    
    (3,112
    )
    
    
    (35
    )%Other International
Waterjet
    
    
    7,182
    
    
    
    4,807
    
    
    
    2,375
    
    
    
    49
    %
    
    
    13,555
    
    
    
    8,796
    
    
    
    4,759
    
    
    
    54
    %Applications
    
    
    463
    
    
    
    533
    
    
    
    (70
    )
    
    
    (13
    )%
    
    
    1,274
    
    
    
    979
    
    
    
    295
    
    
    
    30
    %Total
    
    $
    24,435
    
    
    $
    23,612
    
    
    $
    823
    
    
    
    3
    %
    
    $
    48,035
    
    
    $
    46,643
    
    
    $
    1,392
    
    
    
    3
    %
  Three Months Ended October 31,
    
    Six Months Ended October 31,2007
    
    2006
    
    2007
    
    2006Gross Margin PercentageNorth America Waterjet
    
    
    44
    %
    
    
    46
    %
    
    
    43
    %
    
    
    45
    %Asia Waterjet
    
    
    46
    %
    
    
    55
    %
    
    
    46
    %
    
    
    58
    %Other International Waterjet
    
    
    45
    %
    
    
    40
    %
    
    
    43
    %
    
    
    39
    %Applications
    
    
    9
    %
    
    
    13
    %
    
    
    12
    %
    
    
    12
    %Total
    
    
    41
    %
    
    
    43
    %
    
    
    41
    %
    
    
    43
    %
   21




---



##### Table of Contents



Sales and Marketing Expenses.
 Three Months Ended October 31,
    
    
    Six Months Ended October 31,2007
    
    
    2006
    
    
    Difference
    
    
    %
    
    
    2007
    
    
    2006
    
    
    Difference
    
    
    %Sales and MarketingNorth America Waterjet
    
    $
    5,819
    
    
    $
    6,059
    
    
    $
    (240
    )
    
    
    (4
    )%
    
    $
    11,440
    
    
    $
    11,191
    
    
    $
    249
    
    
    
    2
    %Asia Waterjet
    
    
    1,090
    
    
    
    1,291
    
    
    
    (201
    )
    
    
    (16
    )%
    
    
    2,360
    
    
    
    2,510
    
    
    
    (150
    )
    
    
    (6
    )%Other International
Waterjet
    
    
    3,248
    
    
    
    2,783
    
    
    
    465
    
    
    
    17
    %
    
    
    6,350
    
    
    
    5,434
    
    
    
    916
    
    
    
    17
    %Applications
    
    
    826
    
    
    
    430
    
    
    
    396
    
    
    
    92
    %
    
    
    1,290
    
    
    
    1,025
    
    
    
    265
    
    
    
    26
    %Total
    
    $
    10,983
    
    
    $
    10,563
    
    
    $
    420
    
    
    
    4
    %
    
    $
    21,440
    
    
    $
    20,160
    
    
    $
    1,280
    
    
    
    6
    %
  Research and Engineering Expenses.
 Three Months Ended October 31,
    
    
    Six Months Ended October 31,2007
    
    
    2006
    
    
    Difference
    
    
    %
    
    
    2007
    
    
    2006
    
    
    Difference
    
    
    %Research and EngineeringNorth America Waterjet
    
    $
    1,795
    
    
    $
    2,004
    
    
    $
    (209
    )
    
    
    (10
    )%
    
    $
    3,764
    
    
    $
    3,883
    
    
    $
    (119
    )
    
    
    (3
    )%Asia Waterjet
    
    
    143
    
    
    
    195
    
    
    
    (52
    )
    
    
    (27
    )%
    
    
    244
    
    
    
    414
    
    
    
    (170
    )
    
    
    (41
    )%Other International Waterjet
    
    
    122
    
    
    
    91
    
    
    
    31
    
    
    
    34
    %
    
    
    242
    
    
    
    210
    
    
    
    32
    
    
    
    15
    %Applications
    
    
    85
    
    
    
    49
    
    
    
    36
    
    
    
    73
    %
    
    
    175
    
    
    
    126
    
    
    
    49
    
    
    
    39
    %Total
    
    $
    2,145
    
    
    $
    2,339
    
    
    $
    (194
    )
    
    
    (8
    )%
    
    $
    4,425
    
    
    $
    4,633
    
    
    $
    (208
    )
    
    
    (4
    )%
 TM
 22




---



##### Table of Contents



General and Administrative Expenses.
 Three Months Ended October 31,
    
    
    Six Months Ended October 31,2007
    
    
    2006
    
    
    Difference
    
    
    %
    
    
    2007
    
    
    2006
    
    
    Difference
    
    
    %General and AdministrativeNorth America Waterjet
    
    $
    4,339
    
    
    $
    4,940
    
    
    $
    (601
    )
    
    
    (12
    )%
    
    $
    13,514
    
    
    $
    9,485
    
    
    $
    4,029
    
    
    
    42
    %Asia Waterjet
    
    
    1,310
    
    
    
    2,598
    
    
    
    (1,288
    )
    
    
    (50
    )%
    
    
    2,626
    
    
    
    3,619
    
    
    
    (993
    )
    
    
    (27
    )%Other International
Waterjet
    
    
    964
    
    
    
    936
    
    
    
    28
    
    
    
    3
    %
    
    
    2,199
    
    
    
    1,854
    
    
    
    345
    
    
    
    19
    %Applications
    
    
    662
    
    
    
    508
    
    
    
    154
    
    
    
    30
    %
    
    
    1,352
    
    
    
    1,044
    
    
    
    308
    
    
    
    29
    %Total
    
    $
    7,275
    
    
    $
    8,982
    
    
    $
    (1,707
    )
    
    
    (19
    )%
    
    $
    19,691
    
    
    $
    16,002
    
    
    $
    3,689
    
    
    
    23
    %
  Operating Income (Loss).
 Three Months Ended October 31,
    
    
    Six Months Ended October 31,2007
    
    
    2006
    
    
    Difference
    
    
    %
    
    
    2007
    
    
    2006
    
    
    Difference
    
    
    %Operating IncomeNorth
America
Waterjet
    
    $
    2,183
    
    
    $
    796
    
    
    $
    1,387
    
    
    
    174
    %
    
    $
    (1,339
    )
    
    $
    3,371
    
    
    $
    (4,710
    )
    
    
    (140
    )%Asia Waterjet
    
    
    111
    
    
    
    388
    
    
    
    (277
    )
    
    
    (71
    )%
    
    
    597
    
    
    
    2,395
    
    
    
    (1,798
    )
    
    
    (75
    )%Other
International
Waterjet
    
    
    2,848
    
    
    
    998
    
    
    
    1,850
    
    
    
    185
    %
    
    
    4,764
    
    
    
    1,298
    
    
    
    3,466
    
    
    
    267
    %Applications
    
    
    (1,110
    )
    
    
    (454
    )
    
    
    (656
    )
    
    
    144
    %
    
    
    (1,543
    )
    
    
    (1,216
    )
    
    
    (327
    )
    
    
    27
    %Total
    
    $
    4,032
    
    
    $
    1,728
    
    
    $
    2,304
    
    
    
    133
    %
    
    $
    2,479
    
    
    $
    5,848
    
    
    $
    (3,369
    )
    
    
    (58
    )%
  Interest Income, Interest Expense and Other Income (Expense), Net.
 23




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded October 31,
    
    
    Ended October 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Realized Foreign Exchange Gains (Losses), Net
    
    $
    (423
    )
    
    $
    (382
    )
    
    $
    (481
    )
    
    $
    (343
    )Unrealized Foreign Exchange Gains (Losses), Net
    
    
    528
    
    
    
    848
    
    
    
    905
    
    
    
    1,690Premium on Repurchase of Warrants
    
    
    (629
    )
    
    
    
    
    
    
    (629
    )
    
    
    Hedging Costs
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    (206
    )Other
    
    
    (55
    )
    
    
    (21
    )
    
    
    (62
    )
    
    
    (116
    )$
    (579
    )
    
    $
    399
    
    
    $
    (267
    )
    
    $
    1,025
 Income Taxes.
  Discontinued Operations, Net of Tax.
 Net Income.
 24




---



##### Table of Contents



Changes in Financial Condition and Cash Flows
 Cash Flows
  Six MonthsEnded October 31,2007
    
    
    2006Total cash provided by (used in):Operating activities
    
    $
    (1,703
    )
    
    $
    (3,465
    )Investing activities
    
    
    (1,672
    )
    
    
    (2,681
    )Financing activities
    
    
    (8,373
    )
    
    
    1,998Effect of exchange rates on cash
    
    
    530
    
    
    
    610Decrease in cash and cash equivalents
    
    $
    (11,218
    )
    
    $
    (3,538
    )
 Operating Activities
   Investing Activities
  Financing Activities
  Working Capital
   25




---



##### Table of Contents



Liquidity and Capital Resources
        Off-Balance Sheet Arrangements
  Contractual Obligations
  26




---



##### Table of Contents



Critical Accounting Estimates and Judgments
  Uncertain Tax Positions
  Recently Issued Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
     27




---



##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   Our proposed acquisition of Omax Corporation (Omax) may fail to close or there could be
substantial delays and costs before the acquisition is completed, including the loss of the $6
million consideration paid for the exclusive option to purchase Omax.
  The completion of the acquisition of Omax is subject to the receipt of certain government
authorizations, consents, orders and approvals, including the expiration or termination of the
applicable waiting period (and any extension of the waiting period) under the Hart-Scott-Rodino Act
of 1976.
  If the proposed acquisition of Omax is not closed, the continuation of the litigation could be time
consuming and costly.
  Our acquisition of Omax may result in dilution to our existing shareholders.
  28




---



##### Table of Contents



We may not be able to successfully integrate Omax into our existing business.
  We may assume unknown liabilities in the acquisition of Omax that could harm our financial
condition and operating results.
  We may incur significant indebtedness following the acquisition, which could affect our liquidity.
  29




---



##### Table of Contents



We may be subject to significant financial penalties if the registration statement for the
resale of PIPE securities is not available for resales.
  Our inability to settle our current insurance coverage litigation related to a June, 2002
claim could be time consuming and costly.
  
 
 
 Items 2, 3, and 5 are None and have been omitted.
 
 Item 4. Submission of matters to a Vote of Security Holders.
  
 Item 6. Exhibits
 31.1
    
    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 30




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATIONDate: December 6, 2007

/s/
Charles M. BrownCharles M. BrownPresident and Chief Executive
Officer
(Principal Executive Officer)Date: December 6, 2007

/s/
Douglas P. FletcherDouglas P. FletcherChief Financial Officer
(Principal Financial Officer) 31