##### 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 July 31, 2008
 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
    
    91-1104842(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 23500
- 64th Avenue South
Kent, Washington 98032
(253) 850-3500
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### Table of Contents



Explanatory Note:
 This Form 10-Q reflects the restatement of the Companys Condensed Consolidated Financial
Statements for the quarter ended July 31, 2007 and related Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 2 herein. The restatement is more fully
described in Note 16 to the Condensed Consolidated Financial Statements under Item 1, Financial
Information herein.
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##### Table of Contents



FLOW INTERNATIONAL CORPORATION
  PagePart I  FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets  July 31, 2008 and April 30, 2008
    
    
    4Condensed Consolidated Statements of Income  Three Months ended July 31, 2008 and 2007 (restated)
    
    
    5Condensed Consolidated Statements of Cash Flows  Three Months ended July 31, 2008 and 2007 (restated)
    
    
    6Condensed Consolidated Statement of Shareholders Equity and Comprehensive Income  Three Months Ended July 31, 2008 and 2007 (restated)
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  3




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FLOW INTERNATIONAL CORPORATION
 
 
 July 31,
    
    
    April 30,2008
    
    
    2008ASSETS:Current Assets:Cash and Cash Equivalents
    
    $
    24,706
    
    
    $
    29,099Restricted Cash
    
    
    117
    
    
    
    142Receivables, net
    
    
    33,441
    
    
    
    33,632Inventories
    
    
    28,555
    
    
    
    29,339Deferred Income Taxes
    
    
    2,443
    
    
    
    2,889Deferred Acquisition Costs
    
    
    8,942
    
    
    
    7,953Other Current Assets
    
    
    8,065
    
    
    
    6,456Total Current Assets
    
    
    106,269
    
    
    
    109,510Property and Equipment, net
    
    
    19,545
    
    
    
    18,790Intangible Assets, net
    
    
    4,212
    
    
    
    4,062Goodwill
    
    
    2,764
    
    
    
    2,764Deferred Income Taxes
    
    
    14,926
    
    
    
    15,535Other Assets
    
    
    1,086
    
    
    
    494$
    148,802
    
    
    $
    151,155LIABILITIES AND SHAREHOLDERS EQUITY:Current Liabilities:Notes Payable
    
    $
    1,113
    
    
    $
    1,118Current Portion of Long-Term Obligations
    
    
    1,208
    
    
    
    977Accounts Payable
    
    
    14,951
    
    
    
    19,516Accrued Payroll and Related Liabilities
    
    
    7,993
    
    
    
    8,189Taxes Payable and Other Accrued Taxes
    
    
    4,207
    
    
    
    3,617Deferred Income Taxes
    
    
    683
    
    
    
    686Deferred Revenue
    
    
    3,949
    
    
    
    4,980Customer Deposits
    
    
    4,648
    
    
    
    4,549Other Accrued Liabilities
    
    
    9,839
    
    
    
    9,753Total Current Liabilities
    
    
    48,591
    
    
    
    53,385Long-Term Obligations, net
    
    
    2,344
    
    
    
    2,333Deferred Income Taxes
    
    
    8,349
    
    
    
    7,787Other Long-Term Liabilities
    
    
    1,536
    
    
    
    1,58660,820
    
    
    
    65,091Commitments and Contingencies (Note 7)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, 37,593,768 and
37,589,787 shares issued and outstanding at July 31, 2008 and April 30, 2008,
respectively
    
    
    371
    
    
    
    371Capital in Excess of Par
    
    
    139,438
    
    
    
    139,007Accumulated Deficit
    
    
    (45,981
    )
    
    
    (47,584
    )Accumulated Other Comprehensive Loss:Defined Benefit Plan Obligation, net of income tax of $93 and $93
    
    
    (280
    )
    
    
    (280
    )Cumulative Translation Adjustment, net of income tax of $764 and $764
    
    
    (5,566
    )
    
    
    (5,450
    )Total Shareholders Equity
    
    
    87,982
    
    
    
    86,064$
    148,802
    
    
    $
    151,155
 
 4




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##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 Three Months EndedJuly 31,2007(Restated, see2008
    
    
    Note 16)Sales
    
    $
    57,065
    
    
    $
    57,860Cost of Sales
    
    
    30,934
    
    
    
    34,476Gross Margin
    
    
    26,131
    
    
    
    23,384Expenses:Sales and Marketing
    
    
    10,098
    
    
    
    10,394Research and Engineering
    
    
    2,250
    
    
    
    2,280General and Administrative
    
    
    8,590
    
    
    
    12,346Restructuring Charges
    
    
    1,436
    
    
    
    22,374
    
    
    
    25,020Operating Income (Loss)
    
    
    3,757
    
    
    
    (1,636
    )Interest Income
    
    
    179
    
    
    
    191Interest Expense
    
    
    (130
    )
    
    
    (83
    )Other Income, Net
    
    
    391
    
    
    
    246Income (Loss) Before Provision for Income Taxes
    
    
    4,197
    
    
    
    (1,282
    )Income Tax (Provision) Benefit
    
    
    (2,664
    )
    
    
    1,630Income From Continuing Operations
    
    
    1,533
    
    
    
    348Income from Operations of Discontinued Operations, Net of Income Tax of $37 and $45
    
    
    70
    
    
    
    87Net Income
    
    $
    1,603
    
    
    $
    435Basic Income Per Share:Income From Continuing Operations
    
    $
    .04
    
    
    $
    .01Income from Operations of Discontinued Operations
    
    
    .00
    
    
    
    .00Net Income
    
    $
    .04
    
    
    $
    .01Diluted Income Per Share:Income From Continuing Operations
    
    $
    .04
    
    
    $
    .01Income from Operations of Discontinued Operations
    
    
    .00
    
    
    
    .00Net Income
    
    $
    .04
    
    
    $
    .01Weighted Average Shares Used in Computing Basic and Diluted Income Per Share:Basic
    
    
    37,591
    
    
    
    37,303Diluted
    
    
    38,101
    
    
    
    37,906
 
 5




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FLOW INTERNATIONAL CORPORATION
 
 
 Three Months EndedJuly 31,2007(Restated, see2008
    
    
    Note 16)Cash Flows from Operating Activities:Net Income
    
    $
    1,603
    
    
    $
    435Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:Depreciation and Amortization
    
    
    1,050
    
    
    
    733Deferred Income Taxes
    
    
    1,612
    
    
    
    (2,317
    )Provision for Slow Moving and Obsolete Inventory
    
    
    107
    
    
    
    399Bad Debt Expense
    
    
    66
    
    
    
    203Warranty Expense
    
    
    646
    
    
    
    942Incentive Stock Compensation Expense
    
    
    521
    
    
    
    605Unrealized Foreign Currency (Gains), net
    
    
    (21
    )
    
    
    (377
    )Other
    
    
    (81
    )
    
    
    263Changes in Operating Assets and Liabilities:Receivables
    
    
    84
    
    
    
    534Inventories
    
    
    849
    
    
    
    (2,225
    )Other Operating Assets
    
    
    (2,132
    )
    
    
    864Accounts Payable
    
    
    (5,463
    )
    
    
    (1,314
    )Accrued Payroll and Payroll Related Liabilities
    
    
    (247
    )
    
    
    2,342Deferred Revenue
    
    
    (1,041
    )
    
    
    (244
    )Customer Deposits
    
    
    186
    
    
    
    354Other Operating Liabilities
    
    
    (777
    )
    
    
    (450
    )Cash Provided by Operating Activities
    
    
    (3,038
    )
    
    
    747Cash Flows From Investing Activities:Expenditures for Property and Equipment and Intangible Assets
    
    
    (1,300
    )
    
    
    (1,395
    )Proceeds from Sale of Short-term Investments
    
    
    
    
    
    
    550Proceeds from Sale of Property and Equipment
    
    
    321
    
    
    
    Payments for Pending Acquisition
    
    
    (424
    )
    
    
    Restricted Cash
    
    
    32
    
    
    
    169Cash Used in Investing Activities
    
    
    (1,371
    )
    
    
    (676
    )Cash Flows from Financing Activities:Repayments of Notes Payable
    
    
    
    
    
    
    (5,384
    )Borrowings Under Financing Arrangements
    
    
    723
    
    
    
    Payments of Capital Lease Obligations
    
    
    (35
    )
    
    
    Payments of Long-Term Obligations
    
    
    (434
    )
    
    
    (406
    )Proceeds from Exercise of Stock Options
    
    
    
    
    
    
    424Cash Provided by (Used in) Financing Activities
    
    
    254
    
    
    
    (5,366
    )Effect of Changes in Exchange Rates
    
    
    (238
    )
    
    
    376Increase (Decrease) in Cash And Cash Equivalents
    
    
    (4,393
    )
    
    
    (4,919
    )Cash and Cash Equivalents at Beginning of Period
    
    
    29,099
    
    
    
    38,288Cash and Cash Equivalents at End of Period
    
    $
    24,706
    
    
    $
    33,369Supplemental Disclosures of Noncash Investing and Financing ActivitiesAccounts Payable incurred to acquire Property and Equipment, and Intangible Assets
    
    
    966
    
    
    
    1,091Accrued Liabilities Incurred for Pending Acquisition
    
    
    1,010
    
    
    
    Operating Assets Transferred to Property and Equipment
    
    
    
    
    
    
    243
 
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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
    
    
    $
    139,207
    
    
    $
    (69,395
    )
    
    $
    (8,955
    )
    
    $
    61,224Components of
Comprehensive Income:Net Income
(restated, see
Note 16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    435
    
    
    
    
    
    
    
    435Cumulative
Translation
Adjustment, Net
of Income Tax
of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    522Total Comprehensive
Income (restated, see
Note 16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    957Cumulative effect upon
adoption of FIN 48 (Note
7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (543
    )
    
    
    
    
    
    
    (543
    )Exercise of Options
    
    
    41
    
    
    
    1
    
    
    
    423
    
    
    
    
    
    
    
    
    
    
    
    424Stock Compensation
    
    
    15
    
    
    
    0
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Balances, July 31, 2007
(restated, see Note 16)
    
    
    37,324
    
    
    $
    368
    
    
    $
    139,703
    
    
    $
    (69,503
    )
    
    $
    (8,433
    )
    
    $
    62,135Balances, April 30, 2008
    
    
    37,590
    
    
    $
    371
    
    
    $
    139,007
    
    
    $
    (47,584
    )
    
    $
    (5,730
    )
    
    $
    86,064Components of
Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,603
    
    
    
    
    
    
    
    1,603Cumulative
Translation
Adjustment, Net
of Income Tax
of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    (116
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,487Stock Compensation
    
    
    4
    
    
    
    0
    
    
    
    431
    
    
    
    
    
    
    
    
    
    
    
    431Balances, July 31, 2008
    
    
    37,594
    
    
    $
    371
    
    
    $
    139,438
    
    
    $
    (45,981
    )
    
    $
    (5,846
    )
    
    $
    87,982
 
 7




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##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 Note 1  Basis of Presentation
  Note 2  Recently Issued Accounting Pronouncements
     8




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Note 3  Receivables, Net
  July 31, 2008
    
    
    April 30, 2008Trade Accounts Receivable
    
    $
    31,559
    
    
    $
    32,410Unbilled Revenues
    
    
    4,999
    
    
    
    4,58936,558
    
    
    
    36,999Less: Allowance for Doubtful Accounts
    
    
    (3,117
    )
    
    
    (3,367
    )$
    33,441
    
    
    $
    33,632
 Note 4  Inventories
  July 31, 2008
    
    
    April 30, 2008Raw Materials and Parts
    
    $
    18,573
    
    
    $
    19,671Work in Process
    
    
    3,617
    
    
    
    3,215Finished Goods
    
    
    6,365
    
    
    
    6,453$
    28,555
    
    
    $
    29,339
 9




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Note 5Accrued Liabilities
  Warranty Obligations
   Accrued warranty balance as of April 30, 2008
    
    $
    3,101Accruals for warranties of fiscal year 2009 sales
    
    
    646Warranty costs incurred in fiscal year 2009
    
    
    (764
    )Accrued warranty balance as of July 31, 2008
    
    $
    2,983
 Restructuring Charges
  Three Months EndedJuly 31, 2008Severance and termination benefits
    
    $
    1,436Inventory write-down
    
    
    108$
    1,544
  Note 6  Long-Term Obligations and Notes Payable
  July 31, 2008
    
    
    April 30, 2008Long-term loan
    
    $
    2,486
    
    
    $
    2,914Other Financing Arrangements
    
    
    1,066
    
    
    
    3963,552
    
    
    
    3,310Less current maturities
    
    
    (1,208
    )
    
    
    (977
    )Long-term obligations
    
    $
    2,344
    
    
    $
    2,333
   10




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July 31, 2008
    
    
    April 30, 2008Revolving credit facilities in Taiwan
    
    $
    1,113
    
    
    $
    1,118
  New Senior Credit Facility
 Pending Omax Transaction
 Note 7  Commitments and Contingencies
  Pending Omax Transaction
  11




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Other Legal Proceedings 
 Note 8Stock-based Compensation
  Stock Options
   Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    Aggregate
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Intrinsic
    
    
    RemainingOptions
    
    
    Price
    
    
    Value
    
    
    Contractual Term (Years)Outstanding at April 30, 2008
    
    
    773,500
    
    
    $
    10.53
    
    
    $
    195,801
    
    
    
    3.98Granted during the period
    
    
    236,210
    
    
    
    9.77Exercised during the period
    
    
    
    
    
    
    Expired or forfeited during the period
    
    
    (18,000
    )
    
    
    11.13Outstanding at July 31, 2008
    
    
    991,710
    
    
    $
    10.34
    
    
    $
    12,483
    
    
    
    5.23Exercisable at July 31, 2008
    
    
    605,500
    
    
    $
    10.30
    
    
    $
    12,483
    
    
    
    2.53Vested or expected to vest at July 31, 2008
    
    
    605,500
    
    
    
    10.30
    
    
    
    12,483
    
    
    
    2.53
 Three Months ended July 31,2008
    
    
    2007Total intrinsic value of options exercised
    
    $
    
    
    
    $
    105Total fair value of options vested
    
    $
    345
    
    
    $
    Cash received from exercise of share options
    
    $
    
    
    
    $
    424Tax benefit realized from stock options exercised
    
    $
    
    
    
    $
    
  12




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Three Months ended July 31,2008
    
    2007Options granted
    
    
    236,210
    
    
    
    200,000Weighted average grant-date fair value of stock options granted
    
    $
    5.67
    
    
    $
    6.90Assumptions:Weighted average expected volatility
    
    
    60
    %
    
    
    62.02
    %Risk-free interest rate
    
    
    3.09
    %
    
    
    4.98
    %Weighted average expected term (in years)
    
    
    6
    
    
    
    6Expected dividend yield
    
    
    
    
    
    
    
   Service-Based Stock Awards
   Weighted-AverageNumber of
    
    
    Grant-dateShares
    
    
    Fair ValueNonvested at April 30, 2008
    
    
    325,449
    
    
    $
    8.06Granted during the period
    
    
    192,143
    
    
    
    9.77Forfeited during the period
    
    
    (7,682
    )
    
    
    8.67Vested during the period
    
    
    (5,379
    )
    
    
    6.03Nonvested at July 31, 2008
    
    
    504,531
    
    
    $
    8.67
  Performance-Based Stock Awards
  13




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##### Table of Contents



Weighted-AverageNumber of
    
    
    Grant-dateShares
    
    
    Fair ValueNonvested at April 30, 2008
    
    
    74,500
    
    
    $
    13.50Granted during the period
    
    
    
    
    
    
    Forfeited during the period
    
    
    (4,000
    )
    
    
    13.50Vested during the period
    
    
    
    
    
    
    Nonvested at July 31, 2008
    
    
    70,500
    
    
    $
    13.50
  Note 9Basic and Diluted Income per Share
   Three MonthsEnded July 31,2008
    
    
    2007Numerator:Income from continuing operations
    
    $
    1,533
    
    
    $
    348Denominator:Denominator for basic income per shareweighted average shares outstanding
    
    
    37,591
    
    
    
    37,303Dilutive potential common shares from employee stock options
    
    
    5
    
    
    
    273Dilutive potential common shares from warrants
    
    
    
    
    
    
    268Dilutive potential common shares from service and performance based stock awards
    
    
    505
    
    
    
    62Denominator for diluted income weighted average shares outstanding and assumed
conversions
    
    
    38,101
    
    
    
    37,906Basic and diluted income from continuing operations per share
    
    $
    .04
    
    
    $
    .01
  Note 10Other Income (Expense), Net
   14




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Three MonthsEnded July 31,2008
    
    
    2007Realized Foreign Exchange Gains (Losses), Net
    
    $
    335
    
    
    $
    (58
    )Unrealized Foreign Exchange Gains (Losses), Net
    
    
    21
    
    
    
    377Other
    
    
    35
    
    
    
    (73
    )$
    391
    
    
    $
    246
 Note 11  Income Taxes
       15




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Note 12Discontinued Operations
   Three Months Ended July 31,2008
    
    
    2007Sales
    
    $
    765
    
    
    $
    998Income before provision for income taxes
    
    
    107
    
    
    
    132Provision for income taxes
    
    
    (37
    )
    
    
    (45
    )Income from operations of discontinued operations
    
    
    70
    
    
    
    87
 Note 13  Segment Information
    Inter-segmentStandard
    
    
    Advanced
    
    
    All Other*
    
    
    Eliminations
    
    
    TotalThree Months Ended July 31, 2008External sales
    
    $
    52,754
    
    
    $
    4,311
    
    
    $
    
    
    
    $
    
    
    
    $
    57,065Inter-segment sales
    
    
    479
    
    
    
    
    
    
    
    
    
    
    
    (479
    )Gross margin
    
    
    25,148
    
    
    
    966
    
    
    
    
    
    
    
    17
    
    
    
    26,131Operating income (loss)
    
    
    10,433
    
    
    
    (2,468
    )
    
    
    (4,225
    )
    
    
    17
    
    
    
    3,757Total assets
    
    
    153,939
    
    
    
    24,116
    
    
    
    8,576
    
    
    
    (37,829
    )
    
    
    148,802Three Months Ended July 31, 2007External sales
    
    $
    50,762
    
    
    $
    7,098
    
    
    $
    
    
    
    $
    
    
    
    $
    57,860Inter-segment sales
    
    
    813
    
    
    
    
    
    
    
    
    
    
    
    (813
    )Gross margin
    
    
    22,508
    
    
    
    1,043
    
    
    
    
    
    
    
    (167
    )
    
    
    23,384Operating income (loss)
    
    
    8,007
    
    
    
    (1,519
    )
    
    
    (7,957
    )
    
    
    (167
    )
    
    
    (1,636
    )Total assets
    
    
    115,898
    
    
    
    29,234
    
    
    
    12,425
    
    
    
    (37,353
    )
    
    
    120,205
 16




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##### Table of Contents



*
    
    Includes corporate overhead expenses as well as general and administrative expenses of
inactive subsidiaries that do not constitute segments.  Three Months EndedJuly 31,2008
    
    
    2007Operating income (loss) for reportable segments
    
    $
    3,757
    
    
    $
    (1,636
    )Interest income
    
    
    179
    
    
    
    191Interest expense
    
    
    (130
    )
    
    
    (83
    )Other income, net
    
    
    391
    
    
    
    246Income (loss) before provision for income taxes
    
    $
    4,197
    
    
    $
    (1,282
    )
 17




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##### Table of Contents



Note 14Pending Omax Transaction
     
    
    At Closing, $66 million 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. If the Company elects to pay in cash, the total amount paid
shall not exceed $26 million and shall be paid in full satisfaction of the right to receive
additional shares.
    
    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 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;
 18




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##### Table of Contents




    
    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.
     Commitments and
Contingencies
 Note 15Fair Value of Financial Instruments
    19




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##### Table of Contents



Fair Value Measure at July 31, 2008SignificantQuoted Prices
    
    
    Other
    
    
    SignificantTotal Carrying
    
    
    in Active
    
    
    Observable
    
    
    UnobservableValue at July
    
    
    Market
    
    
    Inputs
    
    
    Inputs31, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Liabilities:Derivatives
    
    $
    62
    
    
    $
    
    
    
    $
    62
    
    
    
    
  Note 16Restatement of Prior Period Financial Statements
    Three Months Ended July 31, 2007As Restated andReclassifiedAs Previously
    
    
    
    
    
    

    for DiscontinuedReported
    
    
    Restated
    
    
    Operations*Condensed Consolidated Statement of Income:Sales
    
    $
    58,666
    
    
    $
    58,858
    
    
    $
    57,860Cost of Sales
    
    
    35,066
    
    
    
    35,221
    
    
    
    34,476Gross Margin
    
    
    23,600
    
    
    
    23,637
    
    
    
    23,384Sales and Marketing Expenses
    
    
    10,457
    
    
    
    10,458
    
    
    
    10,394General & Administrative Expenses
    
    
    12,416
    
    
    
    12,404
    
    
    
    12,346Total Operating Expenses
    
    
    25,153
    
    
    
    25,142
    
    
    
    25,020Operating Loss
    
    
    (1,553
    )
    
    
    (1,505
    )
    
    
    (1,636
    )Other Income
    
    
    312
    
    
    
    246
    
    
    
    246Loss Before Benefit for Income Taxes
    
    
    (1,133
    )
    
    
    (1,151
    )
    
    
    (1,282
    )Income Tax Benefit
    
    
    1,510
    
    
    
    1,586
    
    
    
    1,630
 20




---



##### Table of Contents



Three Months Ended July 31, 2007As Restated andReclassifiedAs Previously
    
    
    
    
    
    
    for DiscontinuedReported
    
    
    Restated
    
    
    Operations*Income from Continuing Operations
    
    
    377
    
    
    
    435
    
    
    
    348Income from Operations of Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    87Net Income
    
    
    377
    
    
    
    435
    
    
    
    435
 Three Months Ended July 31, 2007As PreviouslyReported
    
    
    RestatedCondensed Consolidated Statement of Cash Flows:Net Income
    
    $
    377
    
    
    $
    435Adjustments to Reconcile Net Income to Cash Provided by
Operating Activities:Provision for Slow Moving Inventory
    
    
    **
    
    
    
    399Bad Debt Expense
    
    
    **
    
    
    
    203Warranty Expense
    
    
    **
    
    
    
    942Incentive Stock Compensation Expense
    
    
    698
    
    
    
    605Other
    
    
    266
    
    
    
    263Changes in Operating Assets and Liabilities:Receivables
    
    
    901
    
    
    
    534Inventories
    
    
    (1,826
    )
    
    
    (2,225
    )Other Operating Assets **
    
    
    709
    
    
    
    864Deferred Revenue
    
    
    (185
    )
    
    
    (244
    )Customer Deposits
    
    
    288
    
    
    
    354Other Operating Liabilities **
    
    
    624
    
    
    
    (450
    )Cash Provided by Operating Activities
    
    
    919
    
    
    
    747Cash Flows from Investing Activities:Expenditures for Property and Equipment and Intangible
Assets
    
    
    (1,425
    )
    
    
    (1,395
    )Cash Provided by (Used In) Investing Activities
    
    
    (706
    )
    
    
    (676
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    (4,777
    )
    
    
    (4,919
    )Cash and Cash Equivalents at Beginning of Period
    
    
    38,146
    
    
    
    38,288
 
 *
    
    The Companys Condensed Consolidated Statement of Income for the quarter ended July 31, 2007 has been reclassified to
reflect the results of operations of its CIS Technical Solutions division as discontinued operations.**
    
    Prior year amounts have been conformed to current year presentation in the Condensed Consolidated Financial Statements. 21




---



##### Table of Contents



FLOW INTERNATIONAL CORPORATION
 
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 We have restated our previously issued Condensed Consolidated Financial Statements for the quarter
ended July 31, 2007 as described in Note 16 to the accompanying Condensed Consolidated Financial
Statements included in Item 1. All affected amounts related to the quarter ended July 31, 2007
described herein have been restated accordingly.
 Forward-looking Statements
 This managements discussion and analysis should be read in conjunction with our financial
statements and its related notes. The terms may, expect, believe, anticipate, estimate,
plan and similar expressions are intended to identify forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we
believe that the assumptions underlying our forward-looking statements are reasonable, any of the
assumptions could prove to be inaccurate. Actual results could differ materially from those
projected in these forward-looking statements for a variety of reasons. Examples of
forward-looking statements include, but are not limited to, the following:
 
    
    our belief that the strategies and actions we intend to take in fiscal year 2009 and
beyond, including increasing market awareness of waterjet technology to drive increased
market penetration and improvement of our operational efficiency, will help us achieve our
long-term goals of compound annual revenue growth rate of 10% and operating income annual
growth rate of at least 20%;
    
    our belief that we will be able to fund the commitments for inventory purchases,
including all open purchase orders, with existing cash and our cash flows from operations in
future periods
    
    our investment in the development of innovative products and services to maintain our
technological leadership position as well as enhancement of our current product lines;
    
    our intent to continue to make improvements to our system of internal controls and to
continue to make improvements in the documentation and implementation training of our
accounting policies;
    
    our plan to continue capital spending on information technology and facilities and our
expectation that the funds necessary for this will be generated internally;
    
    our expectation that for matters other than Omax, Crucible, and Collins and Aikman, these
pending legal proceedings will not have a material adverse effect on our consolidated
financial position;
    
    our expectation that our credit line will provide us with liquidity that could be used to
make acquisitions, or fund the repurchase of shares;
    
    our belief that our existing cash, our cash from operations, and credit facilities at
July 31, 2008 are adequate to fund our operations for the next twelve months;
    
    our expectation that our 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.
  22




---



##### Table of Contents




    
    Executive Summary
    
    Results of Operations
    
    Liquidity and Capital Resources
    
    Off Balance Sheet Arrangements
    
    Contractual Obligations
    
    Critical Accounting Policies and Estimates
    
    Recently Issued Accounting Pronouncements
 Executive Summary
  
    
    expand market share in our current markets;
    
    continue to identify and penetrate new markets;
    
    capitalize on the our customer relationships and business competencies;
    
    develop and market innovative products and applications; and
    
    continue to improve operating margins by focusing on operational improvements.
     Introduction of New Products
  Exit or Disposal Activities
   23




---



##### Table of Contents



Results of Operations
 Summary Consolidated Results for the Three Months ended July 31, 2008 and 2007
 Three Months ended July 31,(In thousands, except per share amounts)
    
    2008
    
    
    2007
    
    % ChangeSales
    
    $
    57,065
    
    
    $
    57,860
    
    
    
    (1
    )%Operating Income (Loss)
    
    
    3,757
    
    
    
    (1,636
    )
    
    
    330
    %
 Three Months ended July 31,(In thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    % ChangeSalesSystems
    
    $
    39,088
    
    
    $
    41,462
    
    
    
    (6
    )%Consumable parts
    
    
    17,977
    
    
    
    16,398
    
    
    
    10
    %Total Sales
    
    
    57,065
    
    
    
    57,860
    
    
    
    (1
    )%
   Commitments and
Contingencies Pending Omax Transaction
 Segment Results of Operations
 Segment Information
 24




---



##### Table of Contents



Standard Segment
 Three Months ended July 31,(In thousands)
    
    2008
    
    
    2007
    
    
    % ChangeSales
    
    $
    52,754
    
    
    $
    50,762
    
    
    
    4
    %% of total company sales
    
    
    92
    %
    
    
    88
    %
    
    NMGross Margin
    
    
    25,148
    
    
    
    22,508
    
    
    
    12
    %Gross Margin as % of sales
    
    
    48
    %
    
    
    44
    %
    
    
    4
    %Operating ExpensesSales and Marketing
    
    
    9,584
    
    
    
    9,589
    
    
    
    (0
    )%Research and Engineering
    
    
    1,837
    
    
    
    1,761
    
    
    
    4
    %General and Administrative
    
    
    3,294
    
    
    
    3,151
    
    
    
    5
    %Total Operating Expenses
    
    $
    14,715
    
    
    $
    14,501
    
    
    
    1
    %Operating Income (Loss)
    
    $
    10,433
    
    
    $
    8,007
    
    
    
    30
    %
 
 NM
    
    = Not Meaningful   
    
    In total, system sales declined from $35.9 million in the prior year to $35.7 million
for the quarter ended July 31, 2008, due to weak economic conditions in North America where
system sales declined 28%. This decline was offset by a 29% increase in system sales in our
foreign locations driven by increased market awareness and adoption of waterjet technology,
as well as the benefit of a weaker U.S. dollar.
    
    Consumable parts sales increased 14% to $17 million due to increased number of systems
in service.
    
    Excluding the impact of foreign currency changes, sales decreased $1.7 million or 3%
compared to the prior year comparative period.
   
    
    A reduction in sales and marketing expenses of $5,000 or 0%;
    
    An increase in research and engineering costs of $76,000 or 4% driven by severance costs
related to the streamlining of the product development function; and
    
    An increase in general and administrative expenses of $143,000 or 5% primarily
attributable to slightly higher expenses to support growth in this segment in our foreign
location.
    
    Excluding the impact of foreign currency changes, operating expenses decreased $820,000
compared to the prior year comparative period.
 25




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##### Table of Contents



Advanced Segment
 Three Months ended July 31,(In thousands)
    
    2008
    
    
    2007
    
    
    % ChangeSales
    
    $
    4,311
    
    
    $
    7,098
    
    
    
    (39
    )%% of total company sales
    
    
    8
    %
    
    
    12
    %
    
    NMGross Margin
    
    
    966
    
    
    
    1,043
    
    
    
    (7
    )%Gross Margin as % of sales
    
    
    22
    %
    
    
    15
    %
    
    
    7
    %Operating ExpensesSales and Marketing
    
    
    514
    
    
    
    805
    
    
    
    (36
    )%Research and Engineering
    
    
    413
    
    
    
    519
    
    
    
    (20
    )%General and Administrative
    
    
    1,071
    
    
    
    1,238
    
    
    
    (13
    )%Restructuring Charges
    
    
    1,436
    
    
    
    
    
    
    NMTotal Operating Expenses
    
    $
    3,434
    
    
    $
    2,562
    
    
    
    34
    %Operating Loss
    
    $
    (2,468
    )
    
    $
    (1,519
    )
    
    
    62
    %
 
 NM
    
    = Not Meaningful    
    
    Our exit from non-waterjet automation which contributed $1.8 million of sales in the
prior year comparative period.
    
    A slowdown in our advanced cutting cell business due to the weakness in the automotive
industry.
   
    
    A reduction in sales and marketing expenses of $291,000 or 36% primarily as a result of
a lower customer support costs driven by lower aerospace sales when compared to the prior
year same period;
    
    A reduction in research and engineering costs of $106,000 or 20% related to lower
personnel expenses related to the shutdown of the Burlington facility; and
    
    A reduction in general and administrative expenses of $167,000 or 13% primarily
attributable to a reduction of staff in conjunction with the closure of our manufacturing
facility in Burlington, Ontario, Canada based on our plan to establish a single facility
for designing and building advanced Waterjet systems at our Jeffersonville, Indiana
facility.
    
    Restructuring charges of $1.4 million which were related to severance and termination
benefits associated with our plan to shut down our Burlington, Ontario manufacturing
facility.
 26




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##### Table of Contents



All Other
  (In thousands)
    
    Three Months ended July 31,2008
    
    
    2007
    
    
    % ChangeGeneral and Administrative
    
    
    4,225
    
    
    
    7,957`
    
    
    
    (47
    )%
  27




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##### Table of Contents



Other (Income) Expense
 Interest Income and Interest Expense
  Other Income (Expense), Net
  Three MonthsEnded July 31,2008
    
    
    2007Realized Foreign Exchange Gains (Losses), Net
    
    $
    335
    
    
    $
    (58
    )Unrealized Foreign Exchange Gains (Losses), Net
    
    
    21
    
    
    
    377Other
    
    
    35
    
    
    
    (73
    )$
    391
    
    
    $
    246
  Income Taxes
     28




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##### Table of Contents



Liquidity and Capital Resources
 Cash Flow Summary
  Three Months Ended July 31,2008
    
    
    2007Net Income
    
    $
    1,603
    
    
    $
    435Noncash charges to income
    
    
    3,900
    
    
    
    451Changes in working capital
    
    
    (8,541
    )
    
    
    (139
    )Net cash (used in) provided by operating activities
    
    
    (3,038
    )
    
    
    747Net cash used in investing activities
    
    
    (1,371
    )
    
    
    (676
    )Net cash provided by (used in) financing activities
    
    
    254
    
    
    
    (5,366
    )Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (238
    )
    
    
    376Net decrease in cash and cash equivalents
    
    
    (4,393
    )
    
    
    (4,919
    )Cash and cash equivalents at beginning of period
    
    
    29,099
    
    
    
    38,288Ending cash balance
    
    $
    24,706
    
    
    $
    33,369
 Operating Activities
   Investing Activities
  Financing Activities
  29




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##### Table of Contents



Debt
   Sources of Liquidity
     Off-Balance Sheet Arrangements
  Contractual Obligations
  Critical Accounting Estimates and Judgments
  Recently Issued Accounting Pronouncements
  30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
     31




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##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Items 2, 3, 4, and 5 are None and have been omitted.
 
 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
 32




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##### Table of Contents



FLOW INTERNATIONAL CORPORATIONDate: September 4, 2008
    
    /s/ CHARLES M. BROWNCharles M. BrownPresident and Chief Executive Officer(Principal Executive Officer)Date: September 4, 2008
    
    /s/ DOUGLAS P. FLETCHERDouglas P. FletcherChief Financial Officer(Principal Financial Officer)
 33