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Article by DailyStocks_admin    (12-15-08 08:07 AM)

Filed with the SEC from Dec 04 to Dec 10:

Flow International (FLOW)
Third Point cut its position to 1.75 million shares (4.65%) from the 3.85 million (9.98%) that it had reported owning in September.

BUSINESS OVERVIEW

Flow International Corporation and its subsidiaries (hereinafter collectively referred to as “the Company”, “we”, or “our” unless the context requires otherwise) is a technology-based global company providing customer-driven waterjet cutting and cleaning solutions. Our ultrahigh-pressure water pumps generate pressures from 40,000 to over 87,000 pounds per square inch (psi) and power waterjet systems that are used to cut and clean materials. Waterjet cutting is a fast-growing alternative to traditional cutting methods and has uses in many applications from food and paper products to steel and carbon fiber composites.

This portion of our Form 10-K provides detailed information about who we are, what we do and where we are headed. Unless otherwise specified, current information reported in this Form 10-K is as of, or for the year ended April 30, 2008.

Our History

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


• Invented abrasive waterjet system in 1979

• First to introduce ultrahigh-pressure direct drive pumps up to 55,000 psi in 2000

• First to introduce Windows R -based intelligent waterjet control software — FlowMaster tm — to the industry

• First to introduce a 60,000 psi intensifier pump in 1998

• First to develop advanced motion control waterjet — Dynamic Waterjet R — to increase cut accuracy and speed

• 3-Dimensional 5-Axis Waterjet machining capability

• Introduced 87,000 psi Intensifier Pump in 2006 — which is still unmatched by competition

Business Segments

We operate in four reportable segments, which are North America Waterjet, Asia Waterjet, Other International Waterjet and Applications. The North America, Asia, and Other International Waterjet segments include our cutting and cleaning systems using ultrahigh-pressure as well as parts and services further described below in the respective geographic areas. The Applications segment includes systems for robotic articulation applications and automation systems which may or may not use ultrahigh-pressure. These systems are primarily used in automotive applications. Effective September 2007, our Applications segment ceased the pursuit of sales of non-waterjet automation systems to focus on increasing revenue from systems that integrate waterjet cutting technology.

For further discussion on our business segments, see Note 16: Business Segments and Geographic Information of the Consolidated Financial Statements.

Sales Outside the United States

In fiscal year 2008, 55% — or $133.3 million — of our total consolidated sales were to customers outside the United States, this included:


• $19.6 million of exports from the United States;

• $56.4 million of sales from Europe; and

• $57.3 million of sales from our other foreign locations

Products and Services

Our mission is to provide the highest value customer-driven waterjet cutting and cleaning solutions. We strive to improve our customers’ profitability through the development of innovative products and services that expand our customers’ markets and increase their productivity. The primary components of our product line include versatile waterjet cutting and industrial cleaning systems. We provide total system solutions for various industries including aerospace, automotive, stone and tile, job shop, and industrial cleaning.

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

Waterjet Cutting. The primary application of our ultrahigh-pressure water pumps is cutting. In cutting applications, an ultrahigh-pressure pump pressurizes water from 40,000 to 87,000 psi, and forces it through a small orifice, generating a high-velocity stream of water traveling at three or more times the speed of sound. In order to cut metallic and other hard materials, an abrasive substance, usually garnet is added to the waterjet stream creating an abrasive jet. Our cutting systems typically include a robotic manipulator that moves the cutting head. Our systems may also combine waterjet with other applications such as conventional machining, pick and place handling, inspection, assembly, and other automated processes. Our waterjet cutting systems cut virtually any shape in a single step with edge quality that usually requires no secondary finishing and are the most productive solutions for cutting a wide range of materials from 1 / 16 inch to over 24 inches thick. We offer two different pump technologies: ultrahigh-pressure intensifier and direct drive pumps, ensuring our customers get the pump that is right for them and their unique application. Our intensifier pumps pressurize water up to 87,000 psi, and our direct drive pumps pressurize water up to 55,000 psi.

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

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

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

Marketing and Customers

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

We offer our spare parts and consumables through the Internet at our Flowparts.com website in the U.S. and Floweuropeparts.com in Europe where we strive to ensure that we are able to ship a large number of parts within 24 hours to our customers. We are currently evaluating this option for our other international markets.

We have established strong relationships with a diverse set of customers. No single customer or group of customers under common control accounted for 10% or more of our total consolidated sales in fiscal year 2008.

Our sales are affected by worldwide economic changes. However, we believe that our ability to gain market share in the machine cutting tool market due to the productivity enhancing nature of our ultrahigh-pressure technology and the diversity of our markets, along with the relatively early adoption phase of our technology, enable us to absorb cyclical downturns with less impact than conventional machine tool manufacturers.

Competition in Our Markets

Our major markets — both domestic and foreign — are highly competitive, with our products competing against other waterjet competitors as well as technologies such as lasers, saws, plasma, shears, routers, drills, and abrasive blasting techniques. Most of our waterjet competitors provide only portions of a waterjet system such as pumps or control systems. Other competitors integrate components from a variety of suppliers to provide a complete solution. Under the Flow brand, we compete in the high-end and mid-tier segments of the waterjet cutting market through product quality and superior service reliability, value, service and technology. Through our secondary brand, Waterjet Pro tm , we compete in the lower priced segments of the market. Approximately 80 firms, other than Flow, have developed tools for cleaning and cutting based on waterjet technology. We believe we are the leader in the global waterjet cutting systems market.

Waterjet technology provides manufacturers with an alternative to traditional cutting or cleaning methods, which utilize lasers, saws, knives, shears, plasma, routers, drills and abrasive blasting techniques. Many of the companies that provide these competing methods are larger and more established than Flow.

Waterjet cutting systems offer manufacturers many advantages over traditional cutting machines including an ability to cut or machine virtually any material, in any direction, with improved manufacturing times, and with minimal impact on the material being cut. These factors, in addition to the elimination of secondary processing in many circumstances, enhance the manufacturing productivity of our systems.

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

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

Raw Materials

We depend on the availability of raw materials, parts and subassemblies from our suppliers and subcontractors. Principal materials used to make waterjet products are metals, and plastics, typically in sheets, bar stock, castings, forgings and tubing. We also purchase many electrical and electronic components, fabricated metal parts, high-pressure fluid hoses, ball screws, seals and other items integral to our products. Suppliers are competitively selected based on cost, quality, and delivery. Our suppliers’ ability to provide timely and quality raw materials, components, kits and subassemblies affects our production schedules and contract profitability. We maintain an extensive qualification and performance surveillance system to control risk associated with this reliance on the supply chain. Most significant raw materials we use are available through multiple sources.

Our strategic sourcing initiatives seek to find ways of mitigating the inflationary pressures of the marketplace. In recent years, these inflationary pressures have affected the market for raw materials. The weakening dollar is also causing our supply chain to feel abnormal cost pressures. These factors may force us to renegotiate with our suppliers and customers to avoid a significant impact to our margins and results of operations. These macro-economic pressures may increase our operating costs with consequential risk to our cash flow and profitability. We currently do not employ forward contracts or other financial instruments to hedge commodity price risk, although we continuously explore supply chain risk mitigation strategies.

Intellectual Property

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

Product Development

Our research and development is focused on continued improvement of our existing products and the development of new products. During the year ended April 30, 2008, we expensed $8.3 million related to product research and development as compared to $8.7 million for 2007 and $6.7 million for 2006. Our future success depends on our ability to continue to maintain a robust research and development program that allows us to develop competitive new products and applications that satisfy customer requirements, as well as enhance our current product lines. Research and development costs were between 3% and 4% of total revenue during each of the years ended April 30, 2008, 2007, and 2006.

Backlog

Our backlog increased 14% from $31.0 million at April 30, 2007 to $35.3 million at April 30, 2008. The backlog at April 20, 2008 and 2007 represented 14% of our trailing twelve months sales in each of the respective periods.

Backlog includes firm orders for which written authorizations have been accepted and revenue has not yet been recognized. Generally our products, exclusive of the aerospace product line, can be shipped within a four to 16 week period. Aerospace systems typically have lead times of six to 18 months. The unit sales price for most of our products and services is relatively high (typically ranging from tens of thousands to millions of dollars) and individual orders can involve the delivery of several hundred thousand dollars of products or services at one time. The changes in our backlog are not necessarily indicative of comparable variations in sales or earnings. Due to possible customer changes in delivery schedules and cancellation of orders, our backlog at any particular date is not indicative of actual sales for any succeeding period. Delays in delivery schedules and/or a reduction of backlog during any particular period could have a material adverse effect on our business and results of operations.

Working Capital Practices

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

Employees

We had approximately 759 full time employees as of April 30, 2008 compared to 756 in the prior year. This number includes 59% located in the United States and 41% located in other foreign locations. Our success depends in part on our ability to attract and retain employees. None of our employees are covered by collective bargaining agreements. We continue to have satisfactory employee relations.

Available Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Company’s website at www.flowcorp.com as soon as is reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

The materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and can also be obtained by calling the SEC at 1-800-SEC-0330. Information available on our website is not incorporated by reference in and is not deemed a part of this Form 10-K.

MANAGEMENT DISCUSSION FROM LATEST 10K

We have restated our previously issued Consolidated Financial Statements for the fiscal years ended April 30, 2007 and 2006, as described in Note 20 to the accompanying Consolidated Financial Statements included in Item 8. Note 18 details the impact of the restatement on our previously reported unaudited quarterly financial data for interim periods in 2008 and 2007. All affected amounts and period-to-period comparisons described herein have been restated accordingly.

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

Our MD&A includes the following major sections:


• Executive Summary

• Results of Operations

• Liquidity and Capital Resources

• Contractual Obligations

• Off Balance Sheet Arrangements

• Critical Accounting Policies and Estimates

• Recently Issued Accounting Pronouncements

• Factors Affecting Future Operating Results

Executive Summary

Our objective is to deliver profitable dynamic growth by providing technologically advanced waterjet cutting and cleaning systems to our customers. To achieve this objective, we offer versatile waterjet cutting and industrial cleaning systems and we strive to:


• expand market share in our current markets;

• continue to identify and penetrate new markets;

• capitalize on 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.

Our ability to fully implement our strategies and achieve our objective may be influenced by a variety of factors, many of which are beyond our control. Refer to discussion under Item 1A: Risk Factors .

Certain factors may cause our results to vary year over year. For the three years ended April 30, 2008, we have identified such factors as follows:

Introduction of New Products

In fiscal year 2007, we introduced the 87,000 psi intensifier pump at the bi-annual International Manufacturing Technology Show (IMTS) in September 2006.

In fiscal year 2006, we introduced the Nanojet tm system. This system was used in the semiconductor industry to cut flash memory chips and contributed to 3%, 14% and 28% of sales in the Asia Waterjet segment sales in fiscal years 2008, 2007 and 2006, respectively. Our 55,000 psi Husky pump used in cleaning applications and our Stonecrafter tm machine were also introduced in fiscal year 2006.

Intercompany Transfer Pricing Policy

We updated our intercompany transfer pricing policy effective August 1, 2007 to ensure that transactions among our various subsidiaries involved in various aspects of our business were made on arm’s length terms. While the application of our new intercompany transfer pricing policy did not change our revenue or operating performance on a consolidated basis, it impacted the allocation of operating profit amongst our segments. The impact of the new transfer pricing methodology on segment revenues and operating performance will be discussed in the comparative discussion of fiscal year 2008 to fiscal year 2007 results of operations.

Allocation of Corporate Management Fees

During fiscal year 2008, we have allocated corporate management fees in total of $5.2 million from North America Waterjet to the Company’s other operating segments which is part of the reports evaluated by the chief operating decision maker during the current fiscal year. Fiscal year 2007 has been recast to reflect this methodology. We have not recast the results of operations of fiscal year 2006 as doing so would not be practical.

Exit or Disposal Activities

In April 2008, we decided to sell our CIS Technical Solutions division (“CIS” division), which was previously reported as part of our Applications segment. Accordingly, we have recast all periods presented to reflect the results of operating this division in discontinued operations. Operating income for this division totaled $673,000, $654,000, and $342,000 for the years ended April 30, 2008, 2007 and 2006, respectively.

On June 2, 2008, we committed to a plan to establish a single facility for designing and building our advanced waterjet systems at our Jeffersonville, Indiana facility and to close our manufacturing facility in Burlington, Ontario, Canada. We estimate that the costs associated with the closure of the Burlington facility and the costs associated with moving production to our Jeffersonville facility will range from $2.6 million to $2.8 million in fiscal 2009, including from $1.5 million to $1.7 million for severance and termination benefits and $1 million to $1.2 million for facility closure and relocation costs. Based on our plans to close our Burlington, Ontario manufacturing facility we recorded an impairment charge of $97,000 related to the impairment of long-lived assets in accordance with Statement of Financial Accounting Standard No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Results of Operations

Fiscal year 2008 compared to fiscal year 2007

Sales growth of $30.8 million or 14% was primarily driven by increased adoption of waterjet cutting and cleaning technology in the global markets and increased sales of 87,000 psi systems. The strengthening of the Brazilian Real versus the U.S. dollar improved our competitive position in Latin America markets. Excluding the impact of foreign currency changes, sales increased $20.2 million or 10% in 2008.

Total system sales were up $21.3 million or 14%. Excluding sales to the aerospace industry and Applications segment, system sales increased 22%. Consumable parts sales increased $9.5 million or 16% due to the increased installed base of systems and improved parts availability as well as the use of Flowparts.com and Floweuropeparts.com, our easy-to-use internet order entry systems. Flowparts.com has been deployed in the United States for three years and Floweuropeparts.com has been deployed in Europe for approximately two years.

Operating income growth was primarily driven by the higher sales discussed above along with lower operating expenses related to the timing of new product launches. In the prior year, we incurred expenses related to new core product development such as Stonecrafter tm , the 87,000 psi pump and the 55,000 psi Husky. Additionally, there were lower professional fees for legal, audit, and consulting fees for assistance with Sarbanes-Oxley compliance during the current fiscal year.

Fiscal year 2007 compared to fiscal year 2006

Sales growth was due to management’s focus on the core of our business — ultrahigh-pressure water pumps and the applications that integrate these pumps to cut and clean material. Improved global awareness of the benefits of waterjet cutting and cleaning technology over other traditional methods has resulted in increased global adoption of waterjet cutting and cleaning technology across multiple industries.

Operating income in fiscal year 2007 was negatively impacted by increased material and warranty costs, and the compensation expense incurred to amend the former CEO’s employment contract. Additionally, fiscal year 2007 operating expenses included legal, consulting fees, and losses totaling $3 million related to the Asia investigations which were discussed in previous filings. These investigations related to irregularities discovered in our Taiwan and Korean operations. In response to the investigations’ findings, we developed a remediation plan which has been implemented by senior management with the advice and counsel of the Audit Committee and its advisors. The remediation plan involved rebuilding the Flow Asia organization; including actions to assure clear and comprehensive policies, establish and communicate behavior standards and assure appropriate tone at the top.

Segment Results of Operations

We operate in four reportable segments, which are North America Waterjet, Asia Waterjet, Other International Waterjet and Applications. This section provides a comparison of net sales and operating expenses for each of our segments for the last three fiscal years. For further discussion on our business segments, refer to Note 16: Business Segments and Geographic Information of the Consolidated Financial Statements.

North America Waterjet Segment

Our North America Waterjet segment includes sales and expenses related to our cutting and cleaning systems using ultrahigh-pressure water pumps as well as parts and services to sustain these installed systems in our North America business units.

Fiscal year 2008 compared to fiscal year 2007

In fiscal year 2008:

Sales increased $11.4 million or 10% over the prior year and constituted 53% of total sales primarily due to the following:


• Increased market awareness and adoption of waterjet technology and the positive market reception to our 87,000 psi high pressure pump.

• Strong demand for our spare parts due to increased number of systems in service.

The positive factors above were offset by a $7.3 million or 36% decrease in aerospace sales over the prior year due to delayed aerospace contract awards.

Gross margin for the year ended April 30, 2008 amounted to $61.3 million or 47% of sales compared to $52.7 million or 44% of sales in the prior year. Generally, comparison of gross margin rates will vary period over period based on changes in our product sales mix and prices, which includes advanced systems, standard systems and consumables and levels of production volume. Margins in our North America Waterjet segment increased on improved product pricing and higher intercompany prices charged to foreign subsidiaries.

Operating expense changes consisted of the following:


• A reduction in sales and marketing expenses of $969,000 or 4% primarily as a result of a lower customer support costs driven by lower aerospace sales when compared to the prior year;

• A reduction in research and engineering costs of $288,000 or 4% related to the timing of new product launches. The prior year comparative period included engineering expenses to support new core product development such as Stonecrafter tm , the 87,000 psi pump, and the 55,000 psi pump; and

• A reduction in general and administrative expenses of $3.1 million or 12% primarily attributable to lower professional fees for legal, audit and Sarbanes Oxley compliance costs which were $5.4 million in fiscal year 2008 compared to $8.6 million in the prior year.

Fiscal year 2007 compared to fiscal year 2006

In fiscal year 2007:

Sales increased $9.5 million or 9% over fiscal year 2006 primarily due to the following:


• Increasing demand for our standard shapecutting systems and spare parts due to increased awareness of waterjet cutting technology and investments in awareness campaign and tradeshows.

Aerospace sales decreased $484,000 or 2% from $20.8 million in fiscal year 2006 to $20.3 million in fiscal year 2007 due to delayed aerospace contract awards.

Gross margin for the year ended April 30, 2007, was $52.7 million or 44% of sales compared to $54.1 million or 50% of sales in the prior year. Margins in North America declined from the prior year due to higher material prices and warranty costs, and lower average margins on aerospace systems due to lower volume.

Operating expense changes consisted of the following:


• An increase in sales and marketing expenses of $4 million or 21% which stemmed from increased investment in sales and marketing staff and higher tradeshow expenses due to our attendance at the bi-annual International Manufacturing Technology Show held in Chicago in September 2006;

• An increase of $1.9 million or 31% in research and engineering expenses attributable to additional engineering resources to support the development of new core products such as Stonecrafter tm , the 87,000 psi pump, and the 55,000 psi pump; and • A decrease of $2.6 million or 10% in general and administrative expenses attributable to lower incentive compensation expenses in fiscal year 2007 primarily as a result of a $1.2 million reversal of previously accrued compensation costs related to our Long-term Incentive Plan (LTIP). Additionally, fiscal year 2006 also included costs for the termination of the Key Executive Retention Plan of $899,000 and higher incentive compensation expenses under an annual incentive plan in fiscal year 2006.

Fiscal year 2008 compared to fiscal year 2007

In fiscal year 2008:

Sales decreased $106,000 or 0.3% over the prior year and constituted 13% of total sales due to a slowdown in sales to the semiconductor industry.

Gross margin for the year ended April 30, 2008 amounted to $13.8 million or 45% of sales compared to $17.5 million or 57% of sales in the prior year. Margins in Asia Waterjet segment declined due to changes in our product mix including lower sales to the semiconductor industry and higher intercompany transfer pricing in the current year.

Operating expense changes consisted of the following:


• An increase in sales and marketing expenses of $400,000 or 8% as a result of increased investment in sales staff;

• A reduction in research and engineering costs of $246,000 or 36% due to reduced product development costs related to advanced systems; and

• A reduction in general and administrative expenses of $2.6 million or 36% attributable to lower legal and consulting expenses including a $475,000 benefit from an insurance recovery related to the theft in our Korean operation. Prior year general and administrative expenses included Asia investigation expenses.

Fiscal year 2007 compared to fiscal year 2006

In fiscal year 2007:

Sales decreased $5.4 million or 15% due to the impact of the management disruption of the Asia investigations and a slowdown in sales to the semiconductor industry.

Gross margin for the year ended April 30, 2007 was $17.5 million or 57% of sales compared to $21.6 million or 60% of sales in the prior year. Margins in Asia Waterjet segment declined due to changes in our product mix including lower sales to the semiconductor industry.

Operating expense changes consisted of the following:


• An increase in sales and marketing expenses of $293,000 or 7% due to increased staffing;

• An increase in research and engineering expenses of $101,000 or 17% attributable to increased investment in product development; and

• An increase in general and administrative expenses of $5.3 million or 273% attributable to legal and consulting fees as well as theft losses incurred in relation to the Asia investigations in fiscal year 2007 as well as the allocation of management fees to this reporting segment.

Applications Segment

Our Applications segment offers specialty engineered robotic systems designed for material removal and separation of various materials and for factory automation. Effective September 2007, our Applications segment ceased the pursuit of sales of non-waterjet automation systems and focused on increasing revenue from systems that integrate waterjet cutting technology.

In fiscal year 2008:

Sales increased $1.4 million or 10% over the prior year and constituted 6% of total sales. This increase was primarily as a result of the benefit of a favorable foreign currency impact based on prior year average Canadian Dollar exchange rates.

Gross margin for the year ended April 30, 2008 amounted to $1.4 million or 9% of sales compared to $1.7 million or 13% of sales in the prior year. The comparative percentage margin decline is attributable to expenses mainly as a result of inventory write-downs of $399,000 and severance costs of $234,000 incurred related to the cessation of the pursuit of non-waterjet automation systems.

Operating expenses and changes consisted of the following:


• An increase in sales and marketing expenses of $311,000 or 18% primarily due to bad debt expenses of $413,000 during the current year offset by a decrease in staffing costs during the current fiscal year;

• A reduction in research and engineering costs of $43,000 or 14%; and

• An increase in general and administrative expenses of $844,000 or 49% attributable to higher management fee allocation in the current year when compared to the prior year as well as severance expenses incurred during the current fiscal year. Additionally, based on our plans to close our Burlington, Ontario manufacturing facility in order to establish a single facility for designing and building advanced systems in Jeffersonville, Indiana, we recorded an impairment charge of $97,000 related to the impairment of long-lived assets in accordance with Statement of Financial Accounting Standard No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Fiscal year 2007 compared to fiscal year 2006

Sales decreased $4.3 million or 24% over the prior year and constituted 7% of total sales. The decrease was due to an economic downturn in the domestic automotive industry. To counteract this market issue, we shifted our sales focus to systems that integrate waterjet cutting technology and deemphasized non-waterjet systems in non-automotive markets.

Gross margin for the year ended April 30, 2007 amounted to $1.7 million or 13% of compared to $3.7 million or 20% of sales in the prior year. The comparative percentage margin decline is mainly as a result of increased cost of certain automotive contracts during the first and second fiscal quarters of fiscal year 2007.

Operating expenses and changes consisted of the following:


• An increase in sales and marketing expenses of $755,000 or 75% primarily due to bad debt expenses and investment in additional staff to focus on non-automotive applications;

• An increase in research and engineering costs of $127,000 or 73% as a result of new product development; and

• An increase in general and administrative expenses of $352,000 or 25% attributable to management fee allocation.

Other (Income) Expense

Interest Income and Interest Expense

Our interest income over the last three years was:


• $780,000 in fiscal year 2008;

• $838,000 in fiscal year 2007; and

• $405,000 in fiscal year 2006

The moderate decrease in interest income in fiscal year 2008 when compared to fiscal year 2007 results from a moderate decline in average cash balances during fiscal year 2008 while the increase in fiscal year 2007 when compared to fiscal year 2006 was primarily as a result of an increase in average invested cash balances in fiscal year 2007.

Our Interest Expense over the last three years was:


• $419,000 in fiscal year 2008;

• $409,000 in fiscal year 2007; and

• $1.7 million in fiscal year 2006

Interest expense remained unchanged in fiscal year 2008 when compared to fiscal year 2007. The significant decrease in interest expense when compared to fiscal year 2006 was due to the reduction of our Senior Debt.


CONF CALL

John S. Leness

With me this morning are Charley Brown, Flow’s president and CEO, and Doug Fletcher, Chief Financial Officer.

This call will include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. During the call we will provide selected financial and performance results for the fourth quarter of fiscal 2008. Any statements about future events, trends, risks, and plans should be considered as forward looking. These are based on current expectations only. Actual results may differ from these forward-looking statements and are subject to risks and uncertainties as are detailed in our filings with the Securities and Exchange Commission.

Flow takes no obligation to update any forward-looking statements, whether as a result of new information on future events or otherwise.

With that introduction I’ll turn the call over to Charley Brown.

Charles M. Brown

We are pleased to report an excellent quarter and year in both revenue growth and improved profitability for Flow.

First I will comment on the results for the quarter and then the year, after which Doug will go through the financials in more detail. I will then offer some additional comments prior to addressing your questions.

For the fourth quarter ending April 30h our revenues were $63.3 million representing 21% growth versus last year; 15% organically and 6% from foreign exchange rate changes. System sales grew 23% while spare parts grew 17%.

Breaking down the systems sales further, our core standard system revenue for North America was up 18% for the quarter. Our standard system sales in Europe and Latin America each were up over 30% in Q4. In local currencies our standard system sales in Europe increased by 25%. These results were aided by the continuing roll out of the 87K product line. In Asia standard systems continued their return to historical levels with a 68% increase versus year ago.

Our consumables or spare parts business globally grew 17% for the quarter with consistent performance around the world. Our aerospace business grew 8% in the quarter finishing the year down 36% comprising about 5% of our business for the year. This has been a weak year for our aerospace business due to the delays of equipment purchases supporting major commercial airframe programs.

Our applications business segment sales in local currency were down 19% for the quarter and up only 3% for the full year. The impact of the weak domestic auto industry and our decision to exit the unprofitable non-water automation business impacted revenue in the quarter and for the full year. I will discuss the applications segment and our aerospace business in more detail in a few minutes.

Since early in fiscal 2008 we have communicated that revenue for the year would grow at least 10%, that operating profit would be three to four times higher than fiscal 2007, and that it would represent between 6% and 7% of sales. During our last earnings call we updated our revenue outlook to at least 12% growth. We reiterated our three to four times operating income growth projection and we also said that we expected to hold operating expenses to less than the prior year.

So how did we do against those targets? We delivered each of them as anticipated. Revenue growth for the year was 14% of which 10% was organic and 4% was from foreign exchange. Operating profit was right in the middle of the dollar range and at the high end of the margin range. Operating expenses were 1% below the prior year.

Flow benefits from having a diversified revenue profile that is spread across geographies and end users. Roughly one half of our revenue comes from customers outside the US and no single customer makes up more than 5% of total revenue. Additionally, we have a strong recurring revenue stream from spare parts that made up 28% of revenue in fiscal 2008. Our balanced portfolio allowed us to achieve this double-digit revenue growth this year with some businesses performing very well, notably North America, Europe, Latin America, while others were flat or declining, applications, aerospace, and Asia.

On a quarterly basis our revenue can be impacted by the timing of product launches, large contracts, or the relative strength of our businesses. During fiscal 2008 we were up about 9% in the first two quarters and then we jumped to 19% in the third quarter and 21% in the fourth quarter, all totalling 14% for the year.

From a profitability standpoint we have reigned in SG&A expenditures while still investing in critical infrastructure, including our new information systems project. SG&A declined 560 basis points year over year as a percent of sales. Gross margins were down 240 basis points in the first half of the year, but up 55 basis points in the second half. In total, operating income for the year was 6.9% of sales versus 2.2% in 2007.

I will now turn it over to Doug for further financial commentary.

Douglas P. Fletcher

Before I discuss our operating performance let me touch briefly on backlog. Our backlog as of April 30, 2008, stood at $35.3 million, down slightly from the end of the third quarter and up 14% from the prior year. The aerospace systems backlog, which made up 21% of the total backlog, does not include any amounts for the recently signed Airbus contract. We expect our overall backlog to increase significantly over the next two quarters as we receive the individual systems orders under the Airbus contract.

Net income for the fourth quarter was $13.3 million or $0.35 per basic and fully diluted earnings per share. This compares to a net loss in the prior year period of $3.2 million or a loss of $0.09 per basic and fully diluted earnings per share.

During the fourth quarter we reversed the valuation allowance against our deferred tax asset in the United States and recorded a one-time benefit of $11.8 million. Excluding this benefit, an additional tax expense of approximately $1.9 million recorded in the fourth quarter to adjust our full-year tax expense. Our net income would have been $0.09 per basic and fully diluted earnings per share. For the full year that income was $22.4 million or $0.60 per basic and $0.59 per fully diluted earnings per share. Excluding the one-time benefit from the reversal of the US valuation allowance, net income was $0.28 per basic and fully diluted earnings per share. This compares to net income in the prior year of $3.8 million or $0.10 per basic and fully diluted earnings per share.

Our effective tax rate for fiscal 2008, excluding tax benefit from the valuation allowance release in the United States, was 34%. Much higher than anticipated due to the mix of earnings between our foreign subsidiaries and losses taken in Canada where we have a full valuation allowance.

Our gross profit for the quarter was 41.9%, up from the prior year quarter of 40.8% and 80 basis points below third quarter levels. The positive impact of operating improvements initiated during the year was offset by the impact of a change in product mix and the poor performance in our application segment.

As Charley mentioned, gross profit margins were down in the first half and up in the second half of 2008. But at 41.6% for the year they were down 90 basis points. This was mainly due to product mix and weaker application margins.

On an overall basis, SG&A expenses were $20.3 million in the quarter, down 19% from the prior year. Sales and marketing expenses were up 7% due mainly to higher commissions on increased revenues plus some additions to staff. Research and engineering expenses were down 6% due to the timing of new product launches and improved expense management.

Our general administrative expenses were down $5.1 million or 40% due to the cost of $2.9 million to amend the prior CEO contract reported in the prior year quarter and lower professional fees for patent litigation, external audit, and (inaudible).

For the year SG&A was $84.9 million, down 1% from the prior year as a result of improved expenses control, elimination of some large one-time expenses, and lower professional fees for audit and patent litigation. In fiscal 2009 we will continue to use caution with operating expenditures while making some significant, much-needed investments in our information systems.

Operating profit for the quarter was $6.2 million and operating margin was 9.8%. While we have improved significantly from the prior year, which was an operating loss of $3.5 million, core performance and one-time charges at our applications segment reduced operating performance. For the year, operating income was $16.8 million. Including the CIS business that has been re-casted discontinued operations, operating income was $17.5 million, the middle of the range that we previously communicated.

In other income expense we had a loss of $1.1 million in the fourth quarter driven mainly by unrealized foreign exchange losses. We experienced a lot of volatility during the quarter in a number of the major currencies we do business in, including the Euro, Swiss Franc, Japanese Yen, and Canadian Dollar. While we have some hedging programs in place, we will be expanding these in fiscal 2009 to reduce earnings volatility.

Free cash flow for the fourth quarter, defined as operating cash flow less cash CapEx, was $12.5 million; a significant turnaround from the negative $3.2 million in prior year quarter. For the year, free cash flow was $7.7 million, up from a negative $2.8 million in fiscal 2007. Cash from improved operating profit was offset by increases in net working capital and cash payments under the prior CEO contract amendment.

Cash CapEx was $6.2 million, down slightly from the $6.7 million in the prior year. During fiscal 2009, we expect to spend approximately $8 million on CapEx.

Our balance sheet remains strong with our net cash position of $25.8 million as of April 30, 2008. We had a $29.1 million in cash insured term and investments of which $15 million was held by our divisions outside of the United States.

Last month we announced that we had signed a new $100 million five-year secured credit facility which includes a $65 million revolving credit facility and a $35 million term loan that we may draw upon for the Omax acquisition. We are happy to be able to close this facility with good structure and pricing given the volatile credit markets.

Lastly I want to touch on our 10K filing this week. In the process of closing the books for fiscal 2008 we discovered some minor adjustments from early tax items that should have been reported in fiscal 2006 and had a carry-over impact on fiscal 2007. Because the earnings during those periods were relatively low, these adjustments when aggregated with other items discovered in previous periods that had been deemed immaterial were now material to fiscal 2006.

While the total impact of $0.02 per share over two years is small, we decided to restate fiscal 2006 and 2007. Specifically, the net change to fiscal 2006 reported net income was a decrease of net income by $733,000 or $0.02 per basic and fully diluted per share, and a net change to fiscal 2007 reported net income was an increase of $85,000 and no impact on earnings per share. Later today we will be issuing an 8K regarding this statement and the 10K to be followed later this week will include the restated numbers.

With that I will turn the call back to Charley.

Charles M. Brown

I will now address our plans for the businesses that make up the applications segment, the status of our Omax transaction, and then our outlook for fiscal 2009.

We have not been happy with the results of our applications segment, which lost $3.8 million in fiscal 2008. Last fall we announced our plan to exit the non-waterjet automation business that was closely tied to the domestic auto industry and had been losing money for the past few years.

Last month we announced that we would be closing the home of the applications business, our Burlington facility in Canada, moving manufacturing and engineering functions from there to the new advanced systems centre in Jeffersonville, Indiana. This rationalizes the manufacturing capacity for our cutting cell and slitting products, which Jeffersonville has also produced in the past, so we are confident the transition will be smooth. Our sales team will be retained and our after-market parts business will be served well from our corporate headquarters in Camp Washington.

Also included in the applications business segment is an additional, strategically unrelated, engineering consulting business called CIS. CIS primarily offers outsourced engineering design services to domestic automotive manufacturers, currently a very difficult environment. We have decided to financially classify CIS as a discontinued operation because we will now explore alternatives for this small piece of our business.

The result of these moves is that we have methodically unwound our applications business placing the strategically important and financially viable pieces of business elsewhere in flow where they can flourish. This allows us to reduce our manufacturing footprint and overall cost structure while actually increasing our focus and capability to address the needs of the advanced systems customer segment.

The cost to close the facility and move cutting cell and splitter production to Jeffersonville will be about $2.7 million. We originally expected to complete the move in the fall, but now expect to complete most of the move by the end of July. Approximately $2 million of the estimated expenses are expected to be recorded in the first fiscal quarter of 2009.

Ninety-seven-thousand dollars of charges related to fixed-asset impairment were recorded in the fourth fiscal quarter of 2008. The one-time costs in 2009 will be in the range of what the business lost in fiscal 2008 and we expect to begin realizing the savings in fiscal 2010.

This project is an example of how we planned carefully to deliver on our commitment of 20% compounded EBID growth on a revenue stream growing at one half of that rate.

I want to now touch briefly on our pending Omax merger. As we have previously said, in February we received a request for additional information and documentary material from the Federal Trade Commission in connection with their review of the proposed transaction. We have continued to work closely with the FTC and we hope to have a favourable resolution very shortly. Beyond that, we cannot comment further at this time.

Turning to our outlook for fiscal 2009, I want to first comment on our aerospace business. Two weeks ago we announced the largest program commitment in Flow’s history with Airbus appointing Flow as the provider of the entire order for the new composite machining centres for its A350 program. This wide-bodied aircraft will use state of the art carbon fibre materials to reduce weight and increase fuel efficiency. By choosing Flow waterjets over many competitive cutting and trimming alternatives Airbus is reaffirming that not only are waterjets the best solution, but Flow offers the best technology and support in the world for these applications.

The Airbus commitment is the result of years of work by our aerospace team and is a key strategic building block to delivering our company-wide annual growth rate of 10%. The contract covers an initial order for nine systems, including two systems that we had previously worked on before the original A350 program was cancelled. This is a remarkable achievement because it represents a clean sweep of all systems ordered on this contract. No competitor received a single order for any waterjet systems for the A350 program.

Our nine systems will cut a wide variety of parts at seven different factories across Europe. Revenue from these initial purchases will exceed $30 million and will be recognized over the next 18 to 24 months beginning later this year. Engineering and manufacturing for these products will take place in our recently announced advanced systems technology and manufacturing centre which is an expansion of our Jeffersonville, Indiana, facility.

Finally, I’d like to comment on the US economic slowdown and its impact on our business overall. We are seeing a decline in North American system orders so far this fiscal year and anticipate this will continue, at least for the first half of the year. Interestingly, we are achieving solid growth in our North America aftermarket business, but not enough to make up for the softness in system sales.

Our North American customers are using their waterjets, but in general those considering a new system are very cautious. Fortunately we are not seeing this behaviour in markets outside of North America, which represent roughly one half of our revenue base. As shown in our fiscal 2008 Q4 and full-year results, our growth is derived from a variety of countries and multiple end markets. Our foreign markets remain robust and our aerospace business will clearly provide a strong lift later this year.

Overall, we expect to see flat to low single-digit growth in the first half of the year with a rebound in the second half lead by aerospace, all balancing to eclipse our 10% growth target for the year. However, if the US economic slowdown becomes wide spread globally our aerospace gains may be unable to keep our growth north of 10%. Absent that scenario, we anticipate achieving 10% revenue growth for the year.

While global economic trends could conceivably impact our growth rate we have more control over our profitability and we remain very confident that we will deliver EBID growth this year at least 20% higher than 2008. However we slice it, we consistently come back to our belief that this business can sustain compounded annual growth in revenue of 10% and in operating income of 20%.

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