XNYS:FRM Furmanite Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

    

EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2012

OR

 

¨

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 001-05083

 

 

FURMANITE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   74-1191271

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

10370 Richmond Avenue

Suite 600

Houston, Texas

  77042
(Address of principal executive offices)   (Zip Code)

(972) 699-4000

(Registrant’s telephone number, including area code)

2435 North Central Expressway

Suite 700

Richardson, Texas 75080

(Former name, former address and former

fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    þ  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer ¨   Accelerated filer þ   Non-accelerated filer ¨   Smaller reporting company ¨
    (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

There were 37,250,575 shares of the registrant’s common stock outstanding as of May 2, 2012.

 

 

 


FURMANITE CORPORATION AND SUBSIDIARIES

INDEX

 

     Page
Number
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     3   

PART I. Financial Information

  

Item 1. Financial Statements

  

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     4   

Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (unaudited)

     5   

Consolidated Statements of Comprehensive Income for the Three Months Ended March  31, 2012 and 2011 (unaudited)

     6   

Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March  31, 2012 (unaudited) and for the Year Ended December 31, 2011

     7   

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited)

     8   

Notes to Consolidated Financial Statements (unaudited)

     9   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     31   

Item 4. Controls and Procedures

     31   

PART II. Other Information

  

Item 1. Legal Proceedings

     32   

Item 1A. Risk Factors

     32   

Item 6. Exhibits

     33   

 

2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) may contain forward-looking statements within the meaning of sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Report, including, but not limited to, statements regarding the Company’s future financial position, business strategy, budgets, projected costs, savings and plans, and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. The Company bases its forward-looking statements on reasonable beliefs and assumptions, current expectations, estimates and projections about itself and its industry. The Company cautions that these statements are not guarantees of future performance and involve certain risks and uncertainties that cannot be predicted. In addition, the Company based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate and actual results may differ materially from those expressed or implied by the forward-looking statements. One is cautioned not to place undue reliance on such statements, which speak only as of the date of this Report. Unless otherwise required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances, or otherwise.

 

3


PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

      March 31,
2012
    December 31,
2011
 
Assets    (Unaudited)        

Current assets:

    

Cash and cash equivalents

     $ 29,517        $ 34,524   

Accounts receivable, trade (net of allowance for doubtful accounts of $1,687 and $1,272 as of March 31, 2012 and December 31, 2011, respectively)

     71,626        71,508   

Inventories:

    

Raw materials and supplies

     21,447        19,643   

Work-in-process

     7,825        6,801   

Finished goods

     70        113   

Deferred tax assets, current

     6,639        6,915   

Prepaid expenses and other current assets

     6,770        6,256   
  

 

 

   

 

 

 

Total current assets

     143,894        145,760   

Property and equipment

     85,200        82,758   

Less: accumulated depreciation and amortization

     (50,610)        (48,698)   
  

 

 

   

 

 

 

Property and equipment, net

     34,590        34,060   

Goodwill

     14,624        14,624   

Deferred tax assets

     5,663        5,582   

Intangible and other assets, net

     7,416        7,206   
  

 

 

   

 

 

 

Total assets

     $ 206,187        $ 207,232   
  

 

 

   

 

 

 

Liabilities and Stockholders' Equity

    

Current liabilities:

    

Current portion of long-term debt

   $ 2,481      $ 4,112   

Accounts payable

     18,613        17,381   

Accrued expenses and other current liabilities

     19,200        19,176   

Income taxes payable

     -        1,330   
  

 

 

   

 

 

 

Total current liabilities

     40,294        41,999   

Long-term debt, non-current

     30,055        31,051   

Net pension liability

     12,767        12,374   

Other liabilities

     2,976        2,919   

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Series B Preferred Stock, unlimited shares authorized, none outstanding

     -        -   

Common stock, no par value; 60,000,000 shares authorized; 41,259,538 and 41,140,538 shares issued as of March 31, 2012 and December 31, 2011, respectively

     4,775        4,765   

Additional paid-in capital

     133,675        133,062   

Retained earnings

     10,767        11,597   

Accumulated other comprehensive loss

     (11,109     (12,522

Treasury stock, at cost (4,008,963 shares as of March 31, 2012 and December 31, 2011)

     (18,013     (18,013
  

 

 

   

 

 

 

Total stockholders’ equity

     120,095        118,889   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

     $ 206,187          $ 207,232     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


FURMANITE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

$XXXXX $XXXXX
     For the Three  Months
Ended March 31,
 
     2012      2011  

Revenues

   $ 71,782          $ 73,054      

Costs and expenses:

     

Operating costs (exclusive of depreciation and amortization)

     52,352            50,443      

Depreciation and amortization expense

     2,025            1,875      

Selling, general and administrative expense

     18,156            16,911      
  

 

 

    

 

 

 

Total costs and expenses

     72,533            69,229      
  

 

 

    

 

 

 

Operating income (loss)

     (751)           3,825      

Interest income and other income (expense), net

     (128)           122      

Interest expense

     (401)           (240)     
  

 

 

    

 

 

 

Income (loss) before income taxes

     (1,280)           3,707      

Income tax benefit

     450            319      
  

 

 

    

 

 

 

Net income (loss)

   $ (830)         $ 4,026      
  

 

 

    

 

 

 

Earnings (loss) per common share:

     

Basic

   $ (0.02)         $ 0.11      

Diluted

   $ (0.02)         $ 0.11      

Weighted-average number of common and common equivalent shares used in computing net income (loss) per common share:

     

Basic

     37,206            36,925      

Diluted

     37,206            37,264      

The accompanying notes are an integral part of these consolidated financial statements.

 

5


FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

     For the Three Months
Ended March 31,
 
     2012      2011  

Net income (loss)

   $ (830)         $ 4,026      

Other comprehensive income:

     

Change in pension net actuarial loss and prior service credit, net of tax

     (242)           (225)     

Foreign currency translation adjustments

     1,655            1,924      
  

 

 

    

 

 

 

Total other comprehensive income

     1,413            1,699      
  

 

 

    

 

 

 

Comprehensive income

   $ 583          $ 5,725      
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2012 (Unaudited) and Year Ended December 31, 2011

(in thousands, except share data)

 

     Common Shares      Common     

Additional

Paid-In

    

(Accumulated

Deficit)

    

Accumulated

Other

Comprehensive

     Treasury         
     Issued      Treasury      Stock      Capital      Retained Earnings      Loss      Stock      Total  

Balances at January 1, 2011

       40,925,619         4,008,963       $ 4,745       $ 132,132       $ (12,373)       $ (8,403)       $ (18,013)       $ 98,088     

Net income

     -         -         -         -         23,970         -         -         23,970     

Stock-based compensation and stock option exercises

     214,919         -         20         930         -         -         -         950     

Change in pension net actuarial loss and prior service credit, net of tax

     -         -         -         -         -         (3,097)         -         (3,097)    

Foreign currency translation adjustment

     -         -         -         -         -         (1,022)         -         (1,022)    
  

 

 

 

Balances at December 31, 2011

       41,140,538         4,008,963       $ 4,765       $ 133,062       $ 11,597       $ (12,522)       $ (18,013)       $ 118,889     
  

 

 

 

Net loss

     -         -         -         -         (830)         -         -         (830)    

Stock-based compensation and stock option exercises

     119,000         -         10         613         -         -         -         623     

Change in pension net actuarial loss and prior service credit, net of tax

     -         -         -         -         -         (242)         -         (242)    

Foreign currency translation adjustment

     -         -         -         -         -         1,655         -         1,655     
  

 

 

 

Balances at March 31, 2012

       41,259,538         4,008,963       $ 4,775       $ 133,675       $ 10,767       $ (11,109)       $ (18,013)       $ 120,095     
  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     For the Three Months  
     Ended March 31,  
     2012     2011  

Operating activities:

    

Net income (loss)

   $ (830   $ 4,026   

Reconciliation of net income (loss) to net cash used in operating activities:

    

Depreciation and amortization

     2,025        1,875   

Provision for doubtful accounts

     371        101   

Stock-based compensation expense

     207        206   

Deferred income taxes

     383        (1,217

Other, net

     (411     225   

Changes in operating assets and liabilities:

    

Accounts receivable

     (50     (4,323

Inventories

     (2,750     (2,918

Prepaid expenses and other current assets

     148        (616

Accounts payable

     1,320        462   

Accrued expenses and other current liabilities

     58        2,575   

Income taxes payable

     (1,144     (341

Other, net

     145        (80
  

 

 

   

 

 

 

Net cash used in operating activities

     (528     (25

Investing activities:

    

Capital expenditures

     (2,040     (759

Acquisition of assets and business, net of cash acquired of $1,185 in 2011

     -        (3,921

Proceeds from sale of assets

     11        32   
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,029     (4,648

Financing activities:

    

Proceeds from issuance of debt

     30,000        -   

Payments on debt

     (32,707     (35

Debt issuance costs

     (575     -   

Issuance of common stock

     416        -   
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,866     (35

Effect of exchange rate changes on cash

     416        659   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (5,007     (4,049

Cash and cash equivalents at beginning of period

     34,524        37,170   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 29,517      $ 33,121   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest

   $ 143      $ 192   

Cash paid for income taxes, net of refunds received

   $ 1,161      $ 936   

Non-cash investing and financing activities:

    

Issuance of notes payable to equity holders related to acquistion of business

   $ -      $ 5,300   

The accompanying notes are an integral part of these consolidated financial statements.

 

8


FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

1. General and Summary of Significant Accounting Policies

General

The consolidated interim financial statements include the accounts of Furmanite Corporation (the “Parent Company”) and its subsidiaries (collectively, the “Company” or “Furmanite”). All intercompany transactions and balances have been eliminated in consolidation. These unaudited consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnote disclosures required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) and accruals, necessary for a fair presentation of the financial statements, have been made. Interim results of operations are not necessarily indicative of the results that may be expected for the full year.

Revenue Recognition

Revenues are recorded in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when realized or realizable, and earned.

Revenues are recognized using the completed-contract method, when persuasive evidence of an arrangement exists, services to customers have been rendered or products have been delivered, the selling price is fixed or determinable and collectability is reasonably assured. Revenues are recorded net of sales tax. Substantially all projects are short term in nature; however, the Company occasionally enters into contracts that are longer in duration that represent multiple element arrangements, which include a combination of services and products. The Company separates deliverables into units of accounting based on whether the deliverables have standalone value to the customer. The arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price generally determined using vendor specific objective evidence. Revenues are recognized for the separate units of accounting when services to customers have been rendered or products have been delivered and risk of ownership has passed to the customer. The Company provides limited warranties to customers, depending upon the service performed. Warranty claim costs were not material during either of the three months ended March 31, 2012 or 2011.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the weighted average cost method. Inventory quantities on hand are reviewed regularly based on related service levels and functionality, and carrying cost is reduced to net realizable value for inventories in which their cost exceeds their utility, due to physical deterioration, obsolescence, changes in price levels or other causes. The cost of inventories consumed or products sold are included in operating costs.

Operating Costs

Operating costs include direct and indirect labor along with related fringe benefits, materials, freight, travel, engineering, vehicles, equipment rental and restructuring charges, and are expensed when the associated revenue is recognized or as incurred. Direct costs related to projects for which the earnings process have not been completed and therefore not qualifying for revenue recognition are recorded as work-in-process inventory.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include payroll and related fringe benefits, marketing, travel, rent, information technology, insurance, professional fees and restructuring charges, and are expensed as incurred.

 

9


Income Taxes

The Company accounts for income taxes in accordance with FABS ASC 740 Income Taxes which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected further tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary difference are expected to reverse. The effect on deferred income taxes of a change in tax rates is recognized in income in the period when the changes is enacted.

Based on consideration of all available evidence regarding their utilization, net deferred tax assets are recorded to the extent that it is more likely than not that they will be realized. Where, based on the weight of all available evidence, it is more likely than not that some amount of a deferred tax asset will not be realized, a valuation allowance is established for that amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. In concluding whether a valuation allowance on domestic federal, state or foreign income taxes is required, the Company primarily considered such factors as the history of operating income and losses, future taxable income and the nature of the deferred tax assets.

Income tax expense differs from the expected tax at statutory rates due primarily to changes in valuation allowance for certain deferred tax assets and different tax rates in the various foreign jurisdictions. Additionally, the aggregate tax expense is not always consistent when comparing periods due to the changing income before income taxes mix between domestic and foreign operations and within the foreign operations. Interim period income tax expense or benefit is computed at the estimated annual effective tax rate, unless adjusted for specific discrete items as required.

New Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update (“ASU 2011-12”). ASU 2011-12 provides an update to ASU 2011-05, which updated existing guidance on the presentation of comprehensive income. ASU 2011-12 defers the effective date for presentation of reclassification of items out of accumulated other comprehensive income to net income. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted. The adoption of these updates in the period ended March 31, 2012, changed the presentation and provided additional details on certain consolidated financial statement information but did not have a material impact.

2. Acquisition

On February 23, 2011, Furmanite Worldwide, Inc. (“FWI”), a wholly owned subsidiary of the Parent Company, entered into a Stock Purchase Agreement to acquire 100% of the outstanding stock of Self Leveling Machines, Inc. and a subsidiary of FWI entered into an Asset Purchase Agreement to acquire substantially all of the material operating and intangible assets of Self Levelling Machines Pty. Ltd. (collectively, “SLM”) for total consideration of $8.9 million, net of cash acquired of $1.2 million, of which approximately $4.7 million relates to the Americas and the balance relates to Asia-Pacific. SLM provides large scale on-site machining, which includes engineering, fabrication and execution of highly-specialized machining solutions for large-scale equipment or operations. FWI funded the cost of the acquisition with $5.0 million in cash and by issuing notes payable (the “Notes”) to the sellers’ equity holders for $5.1 million.

 

10


3. Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) are calculated as net income (loss) divided by the weighted-average number of shares of common stock outstanding during the period, which includes restricted stock. Restricted shares of the Company’s common stock have full voting rights and participate equally with common stock in dividends declared and undistributed earnings. As participating securities, the restricted stock awards are included in the calculation of basic EPS using the two-class method. Diluted earnings (loss) per share assumes issuance of the net incremental shares from stock options when dilutive. The weighted-average common shares outstanding used to calculate diluted earnings (loss) per share reflect the dilutive effect of common stock equivalents including options to purchase shares of common stock, using the treasury stock method.

Basic and diluted weighted-average common shares outstanding and earnings (loss) per share include the following (in thousands, except per share data):

 

     For the Three Months  
     Ended March 31,  
     2012     2011  

Net income (loss)

   $ (830   $ 4,026   

Basic weighted-average common shares outstanding

     37,206        36,925   

Dilutive effect of common stock equivalents

     -        339   
  

 

 

   

 

 

 

Diluted weighted-average common shares outstanding

     37,206        37,264   
  

 

 

   

 

 

 

Earnings (loss) per share:

    

Basic

   $ (0.02   $ 0.11   

Dilutive

   $ (0.02   $ 0.11   

Stock options excluded from diluted weighted-average common shares outstanding because their inclusion would have an anti-dilutive effect:

     934        309   

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

     March 31,      December 31,  
     2012      2011  

Compensation and benefits 1

   $ 11,820       $ 12,120   

Estimated potential uninsured liability claims

     1,320         1,320   

Value added tax payable

     1,356         766   

Taxes other than income

     1,136         1,054   

Professional, audit and legal fees

     718         824   

Rent

     492         435   

Customer deposits

     162         443   

Other employee related expenses

     119         214   

Interest

     45         129   

Other2

     2,032         1,871   
  

 

 

    

 

 

 
   $ 19,200       $ 19,176   
  

 

 

    

 

 

 

 

 

1 

Includes restructuring accruals of $0.3 million as of March 31, 2012 and December 31, 2011.

2 

Includes restructuring accruals of $0.4 million as of March 31, 2012 and December 31, 2011.

 

11


5. Restructuring

During the fourth quarter of 2009 and in the first half of 2010, the Company committed to cost reduction initiatives, including planned workforce reductions and restructuring of certain functions. The Company has taken these specific actions in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues.

2009 Cost Reduction Initiative

The Company completed this cost reduction initiative and incurred total costs since inception of approximately $3.4 million. All costs were incurred 2009 and 2010, with all associated payments completed by the end of 2011.

2010 Cost Reduction Initiative

In the second quarter of 2010, the Company committed to an additional cost reduction initiative, primarily related to the restructuring of certain functions within the Company’s EMEA operations. The Company has taken and continues to take specific actions in order to improve the operational and administrative efficiency of its EMEA operations, while providing a structure which will allow for future expansion of operations within the region. There were minimal restructuring costs incurred for the three months ended March 31, 2012. For the three months ended March 31, 2011, restructuring costs incurred of $41 thousand and $47 thousand are included in operating and selling, general and administrative expenses, respectively. The total restructuring costs estimated to be incurred in connection with this cost reduction initiative are $4.0 million. As of March 31, 2012, the costs incurred since the inception of this cost reduction initiative totaled approximately $3.8 million, with the remaining $0.2 million expected to relate primarily to severance and benefits and lease termination costs.

In connection with these initiatives, the Company recorded estimated expenses for severance, lease cancellations, and other restructuring costs in accordance with FASB ASC 420-10, Exit or Disposal Cost Obligations and FASB ASC 712-10, Nonretirement Postemployment Benefits.

The activity related to reserves associated with the remaining cost reduction initiative for the three months ended March 31, 2012 is as follows (in thousands):

 

   

Reserve at

December 31, 2011

    Charges     Cash payments     Foreign currency
adjustments
   

Reserve at

March 31, 2012

 
 

 

 

 

2010 Initiative

         

Severance and benefit costs

    353        1        (24     9        339     

Lease termination costs

    259        -          -          8        267     

Other restructuring costs

    98        -          (8     3        93     
 

 

 

 

Total

    $ 710      $ 1      $ (32   $ 20      $ 699     
 

 

 

 

Restructuring costs associated with the cost reduction initiatives consist of the following (in thousands):

 

     For the Three Months Ended
March 31,
 
     2012      2011  

Severance and benefit costs

     $             1           $             84     

Lease termination costs

     -           (2)     

Other restructuring costs

     -           6     
  

 

 

    

 

 

 

Total

     $ 1           $ 88     
  

 

 

    

 

 

 

 

12


Restructuring costs were incurred in the following geographical areas (in thousands):

 

     For the Three Months  
     Ended March 31,  
     2012      2011  

Americas

     $             -           $             -     

EMEA

     1           88     
  

 

 

    

 

 

 

Total

     $ 1           $ 88     
  

 

 

    

 

 

 

Total workforce reductions related to the cost reduction initiatives included terminations for 171 employees, which include reductions of 31 employees in the Americas (which includes operations in North America, South America and Latin America), 139 employees in EMEA, and one employee in Asia-Pacific.

6. Long-Term Debt

Long-term debt consists of the following (in thousands):

 

    March 31,     December 31,  
    2012     2011  

Borrowings under the previous revolving credit facility (the “Previous Credit Agreement”

    $
 
                –
   
 
  
    $             30,000      

Borrowings under the new revolving credit facility (the “New Credit Agreement”)

    30,000           –      

Capital leases

    65           68      

Notes payable (the “Notes”)

    2,471           5,095      
 

 

 

   

 

 

 

Total long-term debt

    32,536           35,163      

Less: current portion of long-term debt

    (2,481)          (4,112)     
 

 

 

   

 

 

 

Total long-term debt, non-current

    $ 30,055           $ 31,051      
 

 

 

   

 

 

 

Credit Facilities

On March 5, 2012, certain foreign subsidiaries of FWI (the “designated borrowers”) and FWI entered into a new credit agreement dated March 5, 2012 with a banking syndicate led by JP Morgan Chase Bank, N.A., as Administrative Agent (the “New Credit Agreement”). The New Credit Agreement, which matures on February 28, 2017, provides a revolving credit facility of up to $75.0 million. A portion of the amount available under the New Credit Agreement (not in excess of $20.0 million) is available for the issuance of letters of credit. In addition, a portion of the amount available under the New Credit Agreement (not in excess of $7.5 million in the aggregate) is available for swing line loans to FWI. The loans outstanding to the foreign subsidiary designated borrowers under the New Credit Agreement may not exceed $50.0 million in the aggregate.

The proceeds from the initial borrowing on the New Credit Agreement were $30.0 million and were used to repay the amounts outstanding under the Previous Credit Agreement, which was scheduled to mature in January 2013, at which time the Previous Credit Agreement was terminated by the Company. Letters of credit issued from the Previous Credit Agreement were replaced with similar letters of credit by the New Credit Agreement. There were no material circumstances surrounding the termination of the Previous Credit Agreement and no material early termination penalties were incurred by FWI.

At March 31, 2012, $30.0 million was outstanding under the New Credit Agreement. Borrowings under the New Credit Agreement bear interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate, at the option of the borrower, including a margin above such rates, and subject to an adjustment based on a calculated funded debt to Adjusted EBITDA ratio (the “Leverage Ratio” as defined in the New Credit Agreement)), which was 1.5% at March 31, 2012. The New Credit Agreement contains a commitment fee, which ranges from 0.25% to 0.30% based on the Leverage Ratio (0.25% at March 31, 2012), and is based on the unused portion of the amount available under the New Credit Agreement. Adjusted EBITDA is net income plus interest, income taxes, depreciation and amortization, and other non-cash expenses minus income tax credits and non-cash items increasing net income as defined in the New Credit Agreement. All obligations under the New Credit Agreement are guaranteed by FWI and certain of its subsidiaries under a guaranty and collateral agreement, and are secured by a first priority lien on FWI and certain of its subsidiaries’ assets (which approximates $129.4 million as of March 31, 2012). The Parent Company has granted a security interest in its stock of FWI as collateral security for the lenders under the New Credit Agreement, but is not a party to the New Credit Agreement.

 

13


The New Credit Agreement includes financial covenants, which require that the Company maintain: (i) a Leverage ratio of no more than 2.75 to 1.00 as of the last day of each fiscal quarter, measured on a trailing four-quarters basis, (ii) a fixed charge coverage ratio of at least 1.25 to 1.00, defined as Adjusted EBITDA minus capital expenditures / interest plus cash taxes plus scheduled payments of debt plus Restricted Payments made (i.e. all dividends, distributions and other payments in respect of capital stock, sinking funds or similar deposits on account thereof or other returns of capital, redemption or repurchases of equity interests, and any payments to Parent or its subsidiaries (other than FWI and its subsidiaries)), and (iii) a minimum asset coverage of at least 1.50 to 1.00, defined as cash plus net accounts receivable plus net inventory plus net property, plant and equipment of FWI and its Material Subsidiaries that are subject to a first priority perfected lien in favor of the Administrative Agent and the Lenders / Funded Debt. FWI is also subject to certain other compliance provisions including, but not limited to, restrictions on indebtedness, guarantees, dividends and other contingent obligations and transactions. Events of default under the New Credit Agreement include customary events, such as change of control, breach of covenants or breach of representations and warranties. At March 31, 2012, FWI was in compliance with all covenant under the New Credit Agreement.

In 2009, FWI and certain foreign subsidiaries of FWI entered into a credit agreement dated July 31, 2009 with a banking syndicate comprising Bank of America, N.A. and Compass Bank (the “Previous Credit Agreement”). The Previous Credit Agreement provided a revolving credit facility of up to $50.0 million, with a portion of the amount available under the Previous Credit Agreement (not in excess of $20.0 million) available for the issuance of letters of credit. In addition, a portion of the amount available under the Previous Credit Agreement (not in excess of $5.0 million in the aggregate) was available for swing line loans to FWI.

At December 31, 2011, $30.0 million was outstanding under the Previous Credit Agreement. Borrowings under the Previous Credit Agreement, bore interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate, at the option of the borrower, including a margin above such rates, and were subject to an adjustment based on a calculated funded debt to Adjusted EBITDA ratio), which was 2.3% at December 31, 2011. The Previous Credit Agreement also contained a commitment fee, which ranged between 0.25% to 0.30% based on the funded debt to Adjusted EBITDA ratio, and was 0.25% at December 31, 2011, based on the unused portion of the amount available under the Previous Credit Agreement.

Considering the outstanding borrowings of $30.0 million, and $1.5 million related to outstanding letters of credit, the unused borrowing capacity under the New Credit Agreement was $43.5 million at March 31, 2012.

Notes Payable

In connection with the acquisition of SLM, on February 23, 2011, FWI entered into a consent and waiver agreement as it related to the Previous Credit Agreement. Pursuant to the consent and waiver agreement, Bank of America, N.A. and Compass Bank consented to the SLM acquisition and waived any default or event of default for certain debt covenants that would arise as a result of the SLM acquisition. FWI funded the cost of the acquisition with $5.0 million in cash and by issuing the Notes to the sellers’ equity holders for $5.1 million ($2.9 million denominated in U.S. dollar and $2.2 million denominated in Australian dollar) payable in installments, through February 23, 2013. All obligations under the Notes are secured by a first priority lien on the assets acquired in the acquisition. Upon full settlement of the Notes and release of the lien by the sellers’ equity holders, the acquired assets will become assets secured under the New Credit Agreement. At March 31, 2012 and December 31, 2011, $2.5 million and $5.1 million, respectively, was outstanding under the Notes. The Notes bear interest at a fixed rate of 2.5% per annum.

7. Retirement Plans

Two of the Company’s foreign subsidiaries have defined benefit pension plans, one plan covering certain of its United Kingdom employees (the “U.K. Plan”) and the other covering certain of its Norwegian employees (the “Norwegian Plan”). As the Norwegian Plan represents less than four percent of the Company’s total pension plan liabilities and approximately two percent of total pension plan assets, only the schedule of net periodic pension cost (benefit) includes combined amounts from the two plans, while assumption and narrative information relates solely to the U.K. Plan.

 

14


Net periodic pension cost for the U.K. and Norwegian Plans includes the following components (in thousands):

 

       For the Three Months    
     Ended March 31,  
     2012      2011  

Service cost

     $ 258          $ 230      

Interest cost

     893            971      

Expected return on plan assets

     (793)           (945)     

Amortization of prior service cost

     (24)           (25)     

Amortization of net actuarial loss

     228            165      
  

 

 

    

 

 

 

Net periodic pension cost

     $ 562            $ 396      
  

 

 

    

 

 

 

The expected long-term rate of return on invested assets is determined based on the weighted average of expected returns on asset investment categories as follows: 5.3% overall, 6.5% for equities and 3.4% for bonds. Estimated annual pension plan contributions are assumed to be consistent with the current expected contribution level of $1.0 million for 2012.

8. Stock-Based Compensation

Stock Option Plans

The Company has stock option plans and agreements for officers, directors and key employees which allow for the issuance of stock options, restricted stock awards, restricted stock units and stock appreciation rights. For each of the three months ended March 31, 2012 and 2011, the total compensation cost charged against income and included in selling, general and administrative expenses for stock-based compensation arrangement was $0.2 million.

During the first quarter of 2012, the Company granted 154,718 restricted stock units to certain employees with a fair market value of $6.99 per share. The Company also granted 40,000 shares of restricted stock awards to its directors at a grant date fair value of $6.99 per share during the first quarter of 2012. In the first quarter of 2011, the Company granted options to certain employees to purchase 70,000 shares of its common stock with a fair market value of $4.15 per share. The Company uses authorized but unissued shares of common stock for stock option exercises and restricted stock issuances pursuant to the Company’s share-based compensation plan and treasury stock for issuances outside of the plan.

The total unrecognized tax benefit related to stock options and restricted stock as of both March 31, 2012 and December 31, 2011 was approximately $0.5 million. The unrecognized tax benefit related to the disposition of stock options and vesting of restricted stock was insignificant for each of the three months ended March 31, 2012 and 2011. As of March 31, 2012, the total unrecognized compensation expense related to stock options and restricted stock awards was $1.2 million and $2.0 million, respectively.

9. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following (in thousands):

 

     March 31,      December 31,  
         2012              2011      

Net actuarial loss and prior service credit

     $         (17,072)           $         (16,749)     

Less: deferred tax benefit

     4,306            4,225      
  

 

 

    

 

 

 

Net of tax

     (12,766)           (12,524)     

Foreign currency translation adjustment

     1,657            2      
  

 

 

    

 

 

 

Total accumulated other comprehensive loss

     $ (11,109)           $ (12,522)     
  

 

 

    

 

 

 

 

15


10. Income Taxes

For the three months ended March 31, 2012 and 2011, the Company recorded an income tax benefit of $0.5 million and $0.3 million, respectively. For the three months ended March 31, 2012, the income tax benefit reflects the Company’s estimated annual effective income tax rate considering the statutory rates in the countries in which the Company operates and the effects of valuation allowance changes for certain foreign entities. At the end of 2011, it was determined that the net deferred tax assets in the United States were expected to be realized and accordingly the valuation allowance on federal and state deferred tax assets was reversed. For the three months ended March 31, 2011, substantially all domestic federal income taxes, as well as certain state and foreign income taxes, recorded were fully offset by a corresponding change in valuation allowance. The income tax benefit recorded for the three months ended March 31, 2011 consisted primarily of a valuation allowance change resulting in a deferred tax benefit of $1.2 million related to the SLM acquisition, which was partially offset by income tax expenses in foreign and state jurisdictions in which the Company operates.

Income tax benefit as a percentage of loss before income taxes was approximately 35.2% for the three months ended March 31, 2012 and income tax benefit as a percentage of income before income taxes was approximately 8.6% for the three months ended March 31, 2011. Excluding the $1.2 million acquisition related deferred tax benefit noted above, the effective income tax rate for the 2011 period was 23.5%. The remaining difference in the income tax rates between periods is related to the effects of the reversal of the valuation allowance on U.S. deferred tax assets at the end of 2011 as well as changes in the mix of income before income taxes between countries whose income taxes are offset by full valuation allowance and those that are not, and differing statutory tax rates in the countries in which the Company incurs tax liabilities.

In accordance with ASC 740, the Company recognizes the tax benefit from uncertain tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of the position. The tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized non-current tax benefits as part of the income tax provision. The Company incurred no significant interest or penalties for the three months ended March 31, 2012 or 2011. Unrecognized tax benefits at each of March 31, 2012 and December 31, 2011 of $1.1 million for uncertain tax positions related to transfer pricing are included in other liabilities on the consolidated balance sheets and would impact the effective tax rate for certain foreign jurisdictions if recognized.

A reconciliation of the change in the unrecognized tax benefits for the three months ended March 31, 2012 is as follows (in thousands):

 

Balance at December 31, 2011

     $         1,053   

Additions based on tax positions

     37   
  

 

 

 

Balance at March 31, 2012

     $ 1,090   
  

 

 

 

11. Commitments and Contingencies

The operations of the Company are subject to federal, state and local laws and regulations in the U.S. and various foreign locations relating to protection of the environment. Although the Company believes its operations are in compliance with applicable environmental regulations, there can be no assurance that costs and liabilities will not be incurred by the Company. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from operations of the Company, could result in costs and liabilities to the Company. The Company has recorded, in other liabilities, an undiscounted reserve for environmental liabilities related to the remediation of site contamination for properties in the U.S. in the amount of $0.9 million and $1.0 million as of March 31, 2012 and December 31, 2011, respectively. While there is a reasonable possibility due to the inherent nature of environmental liabilities that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts are material to its financial statements.

On September 19, 2011, John Daugherty filed a derivative shareholder petition in the County Court at Law No. 3, Dallas County, Texas, on behalf of the Company against certain of the Company’s directors and executive officers (collectively the “defendants”) and naming

 

16


the Company as a nominal party. The petition alleges the named directors and officers breached their fiduciary responsibilities in regard to certain internal control matters. The petitioner requests that the defendants pay unspecified damages to the Company. On October 31, 2011, the defendants filed their answer in the lawsuit as well as motions to dismiss it. The defendants have informed the Company that they believe this lawsuit is without merit and intend to vigorously defend the lawsuit.

Furmanite America, Inc., a subsidiary of the Company, is involved in disputes with a customer, INEOS USA LLC, who is negotiating with a governmental regulatory agency and claims that the subsidiary failed to provide them with satisfactory services at the customer’s facilities. On April 17, 2009, the customer initiated legal action against the subsidiary in the Common Pleas Court of Allen County, Ohio, alleging that the subsidiary and one of its former employees, who performed data services at one of the customer’s facilities, breached its contract with the customer and failed to provide the customer with adequate and timely information to support the subsidiary’s work at the customer’s facility from 1998 through the second quarter of 2005. The customer’s complaint seeks damages in an amount that the subsidiary believes represents the total proposed civil penalty, plus the cost of unspecified supplemental environmental projects requested by the regulatory agency to reduce air emissions at the customer’s facility, and also seeks unspecified punitive damages. The subsidiary believes that it provided the customer with adequate and timely information to support the subsidiary’s work at the customer’s facilities and will vigorously defend against the customer’s claim.

The Company has contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes, after consulting with counsel, that the ultimate resolution of such contingencies will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.

While the Company cannot make an assessment of the eventual outcome of all of these matters or determine the extent, if any, of any potential uninsured liability or damage, reserves of $1.3 million, which include the Furmanite America, Inc. litigation, were recorded in accrued expenses and other current liabilities as of March 31, 2012 and December 31, 2011. While there is a reasonable possibility that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts are material to its financial statements.

12. Business Segment Data and Geographical Information

The Company provides specialized technical services to an international client base that includes petroleum refineries, chemical plants, pipelines, offshore drilling and production platforms, steel mills, food and beverage processing facilities, power generation, and other flow-process industries.

An operating segment is defined as a component of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. During the third quarter of 2011, the Company expanded its number of reported segments as a result of enhancements in the level of financial information provided to its chief operating decision maker. Prior period information has been compiled to conform to the current year presentation. For financial reporting purposes, the Company operates in three segments which comprise the Company’s three geographical areas: the Americas (which includes operations in North America, South America and Latin America), EMEA (which include operations Europe, the Middle East and Africa) and Asia-Pacific.

The Company evaluates performance based on the operating income (loss) from each segment which excludes interest income and other income (expense), interest expense, and income tax expense (benefit). The accounting policies of the reportable segments are the same as those described in Note 1. Intersegment revenues are recorded at cost plus a profit margin. All transactions and balances between segments are eliminated in consolidation.

 

17


The following is a summary of the financial information of the Company’s reportable segments as of and for the three months ended March 31, 2012 and 2011 reconciled to the amounts reported in the consolidated financial statements (in thousands):

 

         Americas              EMEA             Asia-Pacific          Reconciling
    Items    
        Total      

Three months ended March 31, 2012:

            

Revenues from external customers ¹

   $ 40,698       $ 23,027      $ 8,057       $ -        $ 71,782   

Intersegment revenues ²

     203         1,610        218         (2,031     -     

Operating income (loss)3 4

     4,355         (1,196     226         (4,136     (751

Three months ended March 31, 2011:

            

Revenues from external customers ¹

   $ 40,227       $ 24,673      $ 8,154       $ -        $ 73,054   

Intersegment revenues ²

     1,415         988        83         (2,486     -     

Operating income (loss)3 4

     5,781         771        484         (3,211     3,825   

 

1 

Included in the Americas are domestic revenues of $40.2 million and $37.8 million for the three months ended March 31, 2012 and 2011, respectively.

2 

Reconciling Items represent eliminations or reversals of transactions between reportable segments.

3 

Reconciling Items represent certain corporate overhead costs, including executive management, strategic planning, treasury, legal, human resources, information technology, and accounting risk management, which are not allocated to reportable segments.

4 

Includes corporate headquarter relocation charges of $0.8 million for the three months ended March 31, 2012 in reconciling items and restructuring charges of $0.1 million for the three months ended March 31, 2011 in EMEA.

Goodwill in the Americas at both March 31, 2012 and December 31, 2011 totaled $6.1 million. Goodwill in EMEA and Asia-Pacific totaled $6.6 million and $1.9 million, respectively, at each of March 31, 2012 and December 31, 2011.

The following geographical area information includes total long-lived assets (which consist of all non-current assets, other than goodwill, indefinite-lived intangible assets and deferred tax assets) based on physical location (in thousands):

 

     March 31,
    2012    
     December 31,
    2011    
 

Americas

     $         22,436           $ 21,661     

EMEA

     11,335           11,114     

Asia-Pacific

     5,229           5,500     
  

 

 

    

 

 

 

Total long-lived assets

     $ 39,000           $ 38,275     
  

 

 

    

 

 

 

13. Fair Value of Financial Instruments and Credit Risk

Fair value is defined under FASB ASC 820-10, Fair Value Measurement (“ASC 820-10”), as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820-10 must maximize the use of the observable inputs and minimize the use of unobservable inputs. The standard established a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

 

   

Level 2 — Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.

 

18


   

Level 3 — Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The Company currently does not have any assets or liabilities that would require valuation under ASC 820-10, except for pension assets. The Company does not have any derivatives or marketable securities. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short period to maturity of these instruments. The estimated fair value of all debt as of March 31, 2012 and December 31, 2011 approximated the carrying value. These fair values were estimated based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimates are not necessarily indicative of the amounts that would be realized in a current market exchange.

The Company provides services to an international client base that includes petroleum refineries, chemical plants, offshore energy production platforms, steel mills, nuclear power stations, conventional power stations, pulp and paper mills, food and beverage processing plants, other flow process facilities. The Company does not believe that it has a significant concentration of credit risk at March 31, 2012, as the Company’s accounts receivable are generated from these business industries with customers located throughout the Americas, EMEA and Asia-Pacific.

 

19


FURMANITE CORPORATION AND SUBSIDIARIES

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto of Furmanite Corporation included in Item 1 of this Quarterly Report on Form 10-Q.

Business Overview

Furmanite Corporation, (the “Parent Company”), together with its subsidiaries (collectively the “Company” or “Furmanite”) was incorporated in 1953 and conducts its principal business through its subsidiaries in the technical services industry. The Parent Company’s common stock, no par value, trades under the ticker symbol FRM on the New York Stock Exchange.

The Company provides specialized technical services, including on-line services, which include leak sealing, hot tapping, line stopping, line isolation, composite repair and valve testing. In addition, the Company provides off-line services, which include on-site machining, heat treatment, bolting and valve repair, and other services including smart shim services, concrete repair engineering services, and valve and other products and manufacturing. These products and services are provided primarily to electric power generating plants, petroleum refineries, which include refineries and offshore drilling rigs (including subsea), chemical plants and other process industries in the Americas (which includes operations in North America, South America and Latin America), EMEA (which includes operations in Europe, the Middle East and Africa) and Asia-Pacific through Furmanite.

Financial Overview

For the three months ended March 31, 2012, consolidated revenues decreased by $1.3 million compared to the three months ended March 31, 2011, primarily related to volume decreases in off-line services and were associated with onsite machining, valve repair and bolting services in EMEA and Asia-Pacific. The Company incurred a net loss for the three months ended March 31, 2012 of $0.8 million compared to net income for the three months ended March 31, 2011 of $4.0 million.

In the fourth quarter of 2009, the Company committed to a cost reduction initiative, including planned workforce reductions and restructuring of certain functions, in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues. The Company completed the 2009 cost reduction initiative during 2010 with total restructuring costs incurred since its inception of approximately $3.4 million. The Company estimates the effects of this initiative resulted in annual cost reductions at 2009 activity levels of approximately $11.0 million, primarily compensation expenses, which has favorably impacted selling, general and administrative expenses.

In the second quarter of 2010, the Company committed to an additional cost reduction initiative, primarily related to the restructuring of certain functions within the Company’s EMEA operations. The Company took specific actions in order to improve the operational and administrative efficiency of its EMEA operations, while providing a structure which will allow for future expansion of operations within the region. The Company expects to incur total costs of approximately $4.0 million in connection with this cost reduction initiative, which are primarily related to severance and benefit costs. As of March 31, 2012, restructuring costs of $3.8 million have been incurred since the inception of this additional cost reduction initiative, with the remaining $0.2 million expected to be incurred during the remainder of 2012. The Company estimates the effects of this initiative have resulted in annual cost reductions at 2010 activity levels of approximately $5.0 million, primarily compensation expenses, of which approximately half affected operating costs with the other half impacting selling, general and administrative expenses.

Total restructuring costs from these two initiatives were insignificant for each of the three months ended March 31, 2012 and 2011.

The Company’s loss per share for the three months ended March 31, 2012 was $0.02 compared to diluted earnings per share of $0.11 for the three months ended March 31, 2011.

 

20


Results of Operations

 

     For the Three Months
Ended March 31,
 
      2012      2011  
     (in thousands, except per share data)  

Revenues

     $ 71,782           $ 73,054     

Costs and expenses:

     

Operating costs (exclusive of depreciation and amortization)

     52,352           50,443     

Depreciation and amortization expense

     2,025           1,875     

Selling, general and administrative expense

       18,156           16,911     
  

 

 

    

 

 

 

Total costs and expenses

     72,533           69,229     
  

 

 

    

 

 

 

Operating income (loss)

     (751)         3,825     

Interest income and other income (expense), net

     (128)         122     

Interest expense

     (401)         (240)   
  

 

 

    

 

 

 

Income (loss) before income taxes

     (1,280)         3,707     

Income tax benefit

     450           319     
  

 

 

    

 

 

 

Net income (loss)

     $ (830)         $ 4,026     
  

 

 

    

 

 

 

Earnings (loss) per share:

     

Basic

   $ (0.02)       $ 0.11   

Diluted

   $ (0.02)       $ 0.11   

 

21


Business Segment and Geographical Information

 

     For the Three Months
Ended March 31,
 
     2012      2011  
     (in thousands)  

Revenues:

     

Americas

     $   40,698         $ 40,227   

EMEA

     23,027         24,673   

Asia-Pacific

     8,057         8,154   
  

 

 

    

 

 

 

Total revenues

     71,782         73,054   

Costs and expenses:

     

Operating costs (exclusive of depreciation and amortization)

     

Americas

     28,640         27,104   

EMEA

     18,200         17,717   

Asia-Pacific

     5,512         5,622   
  

 

 

    

 

 

 

Total operating costs (exclusive of depreciation and amortization)

     52,352         50,443   

Operating costs as a percentage of revenue

     72.9%         69.0%   

Depreciation and amortization expense

     

Americas, including corporate

     1,139         1,029   

EMEA

     453         504   

Asia-Pacific

     433         342   
  

 

 

    

 

 

 

Total depreciation and amortization expense

     2,025         1,875   

Depreciation and amortization expense as a percentage of revenue

     2.8%         2.6%   

Selling, general and administrative expense

     

Americas, including corporate¹

     10,710         9,514   

EMEA

     5,560         5,690   

Asia-Pacific

     1,886         1,707   
  

 

 

    

 

 

 

Total selling general and administrative expense

     18,156         16,911   

Selling, general and administrative expense as a percentage of revenue

     25.3%         23.1%   
  

 

 

    

 

 

 

Total costs and expenses

     $ 72,533       $ 69,229   
  

 

 

    

 

 

 

 

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Includes corporate overhead costs of $4.1 million and $3.2 million for the three months ended March 31, 2012 and 2011, respectively.

Geographical areas, based on physical location, are the Americas (including corporate), EMEA and Asia-Pacific. The following discussion and analysis, as it relates to geographic information, excludes intercompany transactions and any allocation of headquarter costs to EMEA or Asia-Pacific.

Revenues

For the three months ended March 31, 2012, consolidated revenues decreased by $1.3 million, or 1.7%, to $71.8 million, compared to $73.1 million for the three months ended March 31, 2011. Changes related to foreign currency exchange rates unfavorably impacted revenues by $0.3 million, of which $0.6 million related to unfavorable impacts in EMEA but were partially offset by $0.3 million of favorable impacts in Asia-Pacific. Excluding the foreign currency exchange rate impact, revenues decreased by $1.0 million, or 1.3%, for the three months ended March 31, 2012 compared to the same period in the 2011. This $1.0 million decrease in revenues consisted of decreases of $1.0 million in EMEA and $0.4 million in Asia-Pacific, which was partially offset by an increase of $0.4 million in the Americas. The decrease in revenues in EMEA was primarily attributable to decreases within off-line services, which related to volume decreases in onsite machining and valve repair services and resulted in an approximate 10% decrease in these revenues as compared to the same period in 2011. In addition, the Central Europe locations within the EMEA region have continued to be negatively impacted by the economic crisis, resulting in unexpectedly lower revenue levels in most service lines. The decrease in revenues in Asia-Pacific was primarily related to volume decreases in off-line and other services, which included volume decreases in onsite machining and bolting services resulting in an approximate 25% decrease in these services when compared to the same period in 2011. The decreases within other services were primarily related to volume decreases in product and manufacturing services

 

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in Singapore. These decreases in Asia-Pacific were partially mitigated by increases in on-line services which increased approximately 19% when compared to on-line service revenues in the same period of 2011 and related to volume increases in leak sealing and composite repair services. The increase in revenues in the Americas was primarily due to volume increases in on-line services and was primarily related to volume increases in line stopping services which resulted in an approximate 7% increase in these revenues when compared to the same period in the 2011. These increases were partially offset by decreases in leak sealing services which decreased by approximately 6% when compared to these revenues in the same period in 2011. In addition contributing to revenue increases in the Americas were volume increases in onsite machining services of approximately 5% when compared to these revenues in the same period in 2011.

Operating Costs (exclusive of depreciation and amortization)

For the three months ended March 31, 2012, operating costs increased $1.9 million, or 3.8%, to $52.3 million, compared to $50.4 million for the three months ended March 31, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $0.3 million, of which $0.5 million related to favorable impacts in EMEA but were partially offset by $0.2 million of unfavorable impacts in Asia-Pacific. Excluding the foreign currency exchange rate impact, operating costs increased by $2.2 million, or 4.4%, for the three months ended March 31, 2012, compared to the same period in 2011. This change consisted of a $1.5 million increase in the Americas and a $1.0 million increase in EMEA but was partially offset by a $0.3 million decrease in Asia-Pacific. The increase in operating costs in the Americas was primarily attributable to an increase in material costs of approximately 7% and was associated with the increase in revenues when compared to the same period in 2011. The increase in EMEA was due to increases in material and labor costs of approximately 5% when compared to the same period in 2011 as the Central Europe locations continued to experience lower utilization of labor and substantially lower contribution margins on projects performed during the current period due to continued negative effects of the economic crisis. The decrease in operating costs in Asia-Pacific was attributable to a decrease in material costs of approximately 15%, partially offset by an increase in labor costs of approximately 8% when compared to the same period in 2011, which was primarily associated with the decrease in revenues and the change in mix of services provided compared to the prior year period.

Operating costs as a percentage of revenue were 72.9% and 69.0% for the three months ended March 31, 2012 and 2011, respectively. The percentage of operating costs to revenues was higher for the three months ended March 31, 2012 compared to the same period in 2011 due primarily to the decrease in revenues, which resulted in lower utilization of labor and absorption of fixed costs, as well as significantly lower margin realization in Central Europe.

Depreciation and Amortization

For the three months ended March 31, 2012, depreciation and amortization expense increased $0.2 million, or 8%, when compared to the same period in 2011. Changes related to foreign currency exchange rates were insignificant for the three months ended March 31, 2012. Depreciation and amortization expense increased due to capital expenditures placed in service and depreciable or amortizable assets acquired, which totaled approximately $8.2 million over the twelve-month period ended March 31, 2012.

Depreciation and amortization expense as a percentage of revenue was 2.8% and 2.6% for the three months ended March 31, 2012 and 2011, respectively.

Selling, General and Administrative

For the three months ended March 31, 2012, selling, general and administrative expenses, including $0.8 million of relocation costs, increased $1.2 million, or 7.1%, to $18.1 million compared to $16.9 million for the three months ended March 31, 2011. Changes related to foreign currency exchange rates were insignificant in the current period. This increase in selling, general and administrative expenses consisted of a $1.2 million increase in the Americas. Selling, general and administrative expenses in EMEA and Asia-Pacific were consistent with the same period in 2011. The increase in selling, general and administrative expenses in the Americas was primarily related to $0.8 million of corporate relocation costs incurred in connection with the relocation of the corporate headquarters to Houston, Texas, which occurred during the three month ended March 31, 2012. In addition, costs increased related to sales salaries and associated costs when compared to the same period in 2011, which was associated with the increase in revenues.

 

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As a result of the above factors, selling, general and administrative expenses as a percentage of revenues increased to 25.3% (or 24.1% excluding relocation costs) for the three months ended March 31, 2012 compared to 23.1% for the three months ended March 31, 2011.

Other Income

Interest Income and Other Income (Expense), Net

For the three months ended March 31, 2012, interest income and other income (expense) decreased $0.2 million when compared to the same period in 2011. Changes within interest income and other income (expense) primarily relate to fluctuations within foreign currency exchange gains and losses.

Interest Expense

For the three months ended March 31, 2012, consolidated interest expense increased $0.2 million when compared to the same period in 2011. The increase in interest expense was primarily due to the acceleration of $0.2 million of debt issuance costs which were expensed due to the termination of the Previous Credit Agreement.

Income Taxes

For the three months ended March 31, 2012 and 2011, the Company recorded an income tax benefit of $0.5 million and $0.3 million, respectively. For the three months ended March 31, 2012, the income tax benefit reflects the Company’s estimated annual effective income tax rate considering the statutory rates in the countries in which the Company operates and the effects of valuation allowance changes for certain foreign entities. At the end of 2011, it was determined that the net deferred tax assets in the United States were expected to be realized and accordingly the valuation allowance on federal and state deferred tax assets was reversed. For the three months ended March 31, 2011, substantially all domestic federal income taxes, as well as certain state and foreign income taxes, recorded were fully offset by a corresponding change in valuation allowance. The income tax benefit recorded for the three months ended March 31, 2011 consisted primarily of a valuation allowance change resulting in a deferred tax benefit of $1.2 million related to the acquisition of Self Leveling Machines (the “SLM acquisition”), which was partially offset by income tax expenses in foreign and state jurisdictions in which the Company operates (see “Liquidity and Capital Resources” for additional information on the SLM acquisition).

Income tax benefit as a percentage of loss before income taxes was approximately 35.2% for the three months ended March 31, 2012 and income tax benefit as a percentage of income before income taxes was approximately 8.6% for the three months ended March 31, 2011. Excluding the $1.2 million acquisition related deferred tax benefit noted above, the effective income tax rate for the 2011 period was 23.5%. The remaining difference in the income tax rates between periods is related to the effects of the reversal of the valuation allowance on U.S. deferred tax assets at the end of 2011 as well as changes in the mix of income before income taxes between countries whose income taxes are offset by full valuation allowance and those that are not, and differing statutory tax rates in the countries in which the Company incurs tax liabilities.

Liquidity and Capital Resources

The Company’s liquidity and capital resources requirements include the funding of working capital needs, the funding of capital investments and the financing of internal growth.

Net cash used in operating activities for the three months ended March 31, 2012 was $0.5 million compared to $25 thousand for the three months ended March 31, 2011. The increase in net cash used in operating activities resulted from the decrease in net income which was partially offset by changes in working capital requirements, primarily within accounts receivable and non-cash items. Changes in working capital decreased cash flow by approximately $2.3 million for the three months ended March 31, 2012 compared with a decrease of $5.2 million for the same period in 2011. In addition, non-cash items for the three months ended March 31, 2011 included a $1.2 million deferred tax benefit recorded in connection with the SLM acquisition.

Net cash used in investing activities decreased to $2.0 million for the three months ended March 31, 2012 from $4.6 million for the three months ended March 31, 2011 primarily due to $3.9 million of cash paid, net of cash acquired of $1.1 million, in connection with the SLM acquisition in 2011. This decrease in cash used relating to the SLM acquisition was partially offset by an increase in capital expenditures from $0.8 million for the three months ended March 31, 2011 to $2.0 million for the three months ended March 31, 2012. The increase in capital expenditures compared to the 2011 period ended is consistent with the Company’s expectations for increased capital investment in the current year.

 

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Consolidated capital expenditures for the calendar year 2012 have been budgeted at $14.0 million to $15.0 million. Such expenditures, however, will depend on many factors beyond the Company’s control, including, without limitation, demand for services as well as domestic and foreign government regulations. No assurance can be given that required capital expenditures will not exceed anticipated amounts during 2012 or thereafter. Capital expenditures during the year are expected to be funded from existing cash and anticipated cash flows from operations.

Net cash used in financing activities increased to $2.9 million for the three months ended March 31, 2012 from $35 thousand for the three months ended March 31, 2011. Financing activities during the current year consisted of $2.7 million of principal payments on the notes payable related to the SLM acquisition and payments of $0.6 million incurred in connection with the Company’s new credit facility. The Company entered into a new credit facility in March of 2012, and received borrowings of $30.0 million from the new credit facility in order to pay its remaining outstanding principal balance of $30.0 million upon the termination of the previous credit facility.

The worldwide economy, including markets in which the Company operates, continues, in varying degrees to remain sluggish, and as such, the Company believes that the risks to its business and its customers remain heightened. Lower levels of liquidity and capital adequacy affecting lenders, increases in defaults and bankruptcies by customers and suppliers, and volatility in credit and equity markets, as observed in this economic environment, could continue to have a negative impact on the Company’s business, operating results, cash flows or financial condition in a number of ways, including reductions in revenues and profits, increased bad debts, and financial instability of suppliers and insurers.

On March 5, 2012, Furmanite Worldwide, Inc. (“FWI”), a wholly owned subsidiary of the Parent Company, and certain foreign subsidiaries of FWI (the “designated borrowers”) entered into a new credit agreement dated March 5, 2012 with a banking syndicate led by JP Morgan Chase Bank, N.A., as Administrative Agent (the “New Credit Agreement”). The New Credit Agreement, which matures on February 28, 2017, provides a revolving credit facility of up to $75.0 million. A portion of the amount available under the New Credit Agreement (not in excess of $20.0 million) is available for the issuance of letters of credit. In addition, a portion of the amount available under the New Credit Agreement (not in excess of $7.5 million in the aggregate) is available for swing line loans to FWI. The loans outstanding to the foreign subsidiary designated borrowers under the New Credit Agreement may not exceed $50.0 million in the aggregate.

The proceeds from the initial borrowing on the New Credit Agreement were $30.0 million and were used to repay the amounts outstanding under the Previous Credit Agreement, which was scheduled to mature in January 2013, at which time the Previous Credit Agreement was terminated by the Company. Letters of credit issued from the Previous Credit Agreement were replaced with similar letters of credit by the New Credit Agreement. There were no material circumstances surrounding the termination of the Previous Credit Agreement and no material early termination penalties were incurred by FWI.

At March 31, 2012, $30.0 million was outstanding under the New Credit Agreement. Borrowings under the New Credit Agreement bear interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate, at the option of the borrower, including a margin above such rates, and subject to an adjustment based on a calculated funded debt to Adjusted EBITDA ratio (the “Leverage Ratio” as defined in the New Credit Agreement)), which was 1.5% at March 31, 2012. The New Credit Agreement contains a commitment fee, which ranges from 0.25% to 0.30% based on the Leverage Ratio (0.25% at March 31, 2012), and is based on the unused portion of the amount available under the New Credit Agreement. Adjusted EBITDA is net income plus interest, income taxes, depreciation and amortization, and other non-cash expenses minus income tax credits and non-cash items increasing net income as defined in the New Credit Agreement. All obligations under the New Credit Agreement are guaranteed by FWI and certain of its subsidiaries under a guaranty and collateral agreement, and are secured by a first priority lien on FWI and certain of its subsidiaries’ assets (which approximates $129.4 million as of March 31, 2012). The Parent Company has granted a security interest in its stock of FWI as collateral security for the lenders under the New Credit Agreement, but is not a party to the New Credit Agreement.

The New Credit Agreement includes financial covenants, which require that the Company maintain: (i) a Leverage Ratio of no more than 2.75 to 1.00 as of the last day of each fiscal quarter, measured on a trailing four-quarters basis, (ii) a fixed charge coverage ratio of at least 1.25 to 1.00, defined as Adjusted EBITDA minus capital expenditures / interest plus cash taxes plus scheduled payments of debt plus Restricted Payments made (i.e. all dividends, distributions and other payments in respect of capital stock, sinking funds or similar deposits on account thereof or other returns of capital, redemption or repurchases of equity interests, and any payments to Parent or its subsidiaries (other than FWI and its Subsidiaries)), and (iii) a minimum asset coverage of at least 1.50 to 1.00, defined as cash plus net accounts receivable plus net inventory plus net property, plant and equipment of FWI and its Material Subsidiaries that are subject to a first priority perfected lien in favor of the Administrative Agent and the Lenders / Funded Debt. FWI is also subject to

 

25


certain other compliance provisions including, but not limited to, restrictions on indebtedness, guarantees, dividends and other contingent obligations and transactions. Events of default under the New Credit Agreement include customary events, such as change of control, breach of covenants or breach of representations and warranties. At March 31, 2012, FWI was in compliance with all covenant under the New Credit Agreement.

In 2009, FWI, and certain foreign subsidiaries of FWI entered into a credit agreement dated July 31, 2009 with a banking syndicate comprising Bank of America, N.A. and Compass Bank (the “Previous Credit Agreement”). The Previous Credit Agreement provided a revolving credit facility of up to $50.0 million, with a portion of the amount available under the Previous Credit Agreement (not in excess of $20.0 million) available for the issuance of letters of credit. In addition, a portion of the amount available under the Previous Credit Agreement (not in excess of $5.0 million in the aggregate) was available for swing line loans to FWI.

At December 31, 2011, $30.0 million was outstanding under the Previous Credit Agreement. Borrowings under the Previous Credit Agreement, bore interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate, at the option of the borrower, including a margin above such rates, and were subject to an adjustment based on a calculated funded debt to Adjusted EBITDA ratio), which was 2.3% at December 31, 2011. The Previous Credit Agreement also contained a commitment fee, which ranged between 0.25% to 0.30% based on the funded debt to Adjusted EBITDA ratio, and was 0.25% at December 31, 2011, based on the unused portion of the amount available under the Previous Credit Agreement.

Considering the outstanding borrowings of $30.0 million, and $1.5 million related to outstanding letters of credit, the unused borrowing capacity under the New Credit Agreement was $43.5 million at March 31, 2012.

On February 23, 2011, FWI entered into a Stock Purchase Agreement to acquire 100% of the outstanding stock of Self Leveling Machines, Inc. and a subsidiary of FWI entered into an Asset Purchase Agreement to acquire substantially all of the material operating and intangible assets of Self Levelling Machines Pty. Ltd. for total consideration of $8.9 million, net of cash acquired of $1.2 million, of which approximately $4.7 million relates to the Americas and the balance relates to Asia-Pacific. SLM provides large scale on-site machining, which includes engineering, fabrication and execution of highly-specialized machining solutions for large-scale equipment or operations.

In connection with the acquisition of SLM, on February 23, 2011, FWI entered into a consent and waiver agreement as it related to the Previous Credit Agreement. Pursuant to the consent and waiver agreement, Bank of America, N.A. and Compass Bank consented to the SLM acquisition and waived any default or event of default for certain debt covenants that would arise as a result of the SLM acquisition. FWI funded the cost of the acquisition with $5.0 million in cash and by issuing notes payable (the “Notes”) to the sellers’ equity holders for $5.1 million ($2.9 million denominated in U.S. dollar and $2.2 million denominated in Australian dollar) payable in installments, through February 23, 2013. All obligations under the Notes are secured by a first priority lien on the assets acquired in the acquisition. Upon full settlement of the Notes and release of the lien by the sellers’ equity holders, the acquired assets will become assets secured under the New Credit Agreement. At March 31, 2012 and December 31, 2011, $2.5 million and $5.1 million, respectively, was outstanding under the Notes. The Notes bear interest at a fixed rate of 2.5% per annum.

The Company committed to cost reduction initiatives at the end of 2009 and in the first half of 2010 in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues. As of March 31, 2012, the costs incurred since the inception of these cost reduction initiatives totaled approximately $7.2 million. During the three months ended March 31, 2012, the Company incurred minimal restructuring charges related to the 2010 initiative and made cash payments of $32 thousand related to the 2010 initiatives. As of March 31, 2012, the remaining reserve associated with these initiatives totaled $0.7 million with estimated additional charges to be incurred of approximately $0.2 million, all of which are expected to require cash payments. Total workforce reductions, which began in the fourth quarter of 2009, included terminations for 171 employees, which included reductions of 31 employees in the Americas, 139 employees in EMEA, and one employee in Asia-Pacific.

The Company does not anticipate paying any dividends as it believes investing earnings back into the Company will provide a better long-term return to stockholders in increased per share value. The Company believes that funds generated from operations, together with existing cash and available credit under the new Credit Agreement, will be sufficient to finance current operations, including the Company’s cost reduction initiative obligations, planned capital expenditure requirements and internal growth for the foreseeable future.

 

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Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant policies are presented in the Notes to the Consolidated Financial Statements and under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Critical accounting policies are those that are most important to the portrayal of the Company’s financial position and results of operations. These policies require management’s most difficult, subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting policies and estimates, for which no significant changes have occurred in the three months ended March 31, 2012, include revenue recognition, allowance for doubtful accounts, goodwill, intangible and long-lived assets, stock-based compensation, income taxes, defined benefit pension plan, contingencies, and exit or disposal obligations. Critical accounting policies are discussed regularly, at least quarterly, with the Audit Committee of the Company’s Board of Directors.

Revenue Recognition

Revenues are recorded in accordance with Financial Account Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when realized or realizable, and earned.

Revenues are recognized using the completed-contract method, when persuasive evidence of an arrangement exists, services to customers have been rendered or products have been delivered, the selling price is fixed or determinable and collectability is reasonably assured. Revenues are recorded net of sales tax. Substantially all projects are short term in nature; however, the Company occasionally enters into contracts that are longer in duration that represent multiple element arrangements, which include a combination of services and products. The Company separates deliverables into units of accounting based on whether the deliverables have standalone value to the customer. The arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price generally determined using vendor specific objective evidence. Revenues are recognized for the separate units of accounting when services to customers have been rendered or products have been delivered and risk of ownership has passed to the customer. The Company provides limited warranties to customers, depending upon the service performed. Warranty claim costs were not material during either of the three months ended March 31, 2012 or 2011.

Allowance for Doubtful Accounts

Credit is extended to customers based on evaluation of the customer’s financial condition and generally collateral is not required. Accounts receivable outstanding longer than contractual payment terms are considered past due. The Company regularly evaluates and adjusts accounts receivable as doubtful based on a combination of write-off history, aging analysis and information available on specific accounts. The Company writes off accounts receivable when they become uncollectible. Any payments subsequently received on such receivables are credited to the allowance in the period the payment is received.

Long-Lived Assets

Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with the provisions of FASB ASC 350, Intangibles — Goodwill and Other. Under FASB ASC 350, intangible assets with lives restricted by contractual, legal or other means are amortized over their useful lives. Finite-lived intangible assets are reviewed for impairment in accordance with the provisions of FASB ASC 360.

 

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Goodwill and other intangible assets not subject to amortization are tested for impairment annually (in the fourth quarter of each calendar year), or more frequently if events or changes in circumstances indicate that the assets might be impaired. Examples of such events or circumstances include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, or a loss of key personnel.

FASB ASC 350 requires a two-step process for testing goodwill impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. A reporting unit is an operating segment or one level below an operating segment (referred to as a component). Two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. The Company has three reporting units for the purpose of testing goodwill impairment as the business segments are determined to be the reporting units. Second, if an impairment is indicated, the implied fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of the carrying value over the implied fair value.

The Company uses market capitalization as the basis for its measurement of the Company’s fair value as management considers this approach the most meaningful measure, considering the quoted market price as providing the best evidence of fair value. In performing the analysis, the Company uses the stock price on December 31 of each year as the valuation date. The fair value is allocated to the reporting units based on relative fair values, considering factors including expected future discounted cash flows using reasonable and appropriate assumptions about the underlying business activities of each reporting unit. As of December 31, 2011, the Company’s fair value substantially exceeded its carrying value in each of its three reporting units, therefore no impairment was indicated. Additionally, no changes in circumstances have occurred in the three months ended March 31, 2012 which would warrant an additional impairment test in the current period. At each of March 31, 2012 and December 31, 2011, goodwill totaled $14.6 million. Goodwill totaled $6.1 million, $6.6 million and $1.9 million at each of March 31, 2012 and December 31, 2011 in the Americas, EMEA, and Asia-Pacific, respectively.

Property, Plant and Equipment

The Company accounts for long-lived assets in accordance with the provisions of FASB ASC 360, Property, Plant, and Equipment. Under FASB ASC 360, the Company reviews long-lived assets, which consist of finite-lived intangible assets and property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Factors that may affect recoverability include changes in planned use of equipment, closing of facilities and discontinuance of service lines. Property and equipment to be held and used is reviewed at least annually for possible impairment. The Company’s impairment review is based on an estimate of the undiscounted cash flow at the lowest level for which identifiable cash flows exist. Impairment occurs when the carrying value of the assets exceeds the estimated future undiscounted cash flows generated by the asset and the impairment is viewed as other than temporary. When impairment is indicated, an impairment charge is recorded for the difference between the carrying value of the asset and its fair market value. Depending on the asset, fair market value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition. In 2011, an impairment of $0.9 million was recorded to write down certain assets in Germany based on the Company’s decision to discontinue providing certain services in that country.

Stock-Based Compensation

All stock-based compensation is recognized as an expense in the financial statements and such costs are measured at the fair value of the award at the date of grant. The fair value of stock-based payment awards on the date of grant as determined by the Black-Scholes model is affected by the Company’s stock price on the date of the grant as well as other assumptions. Assumptions utilized in the fair value calculations include the expected stock price volatility over the term of the awards (estimated using the historical volatility of the Company’s stock price), the risk free interest rate (based on the U.S. Treasury Note rate over the expected term of the option), the dividend yield (assumed to be zero, as the Company has not paid, nor anticipates paying, any cash dividends in the foreseeable future), and employee stock option exercise behavior and forfeiture assumptions (based on historical experience and other relevant factors).

Income Taxes

Deferred tax assets and liabilities result from temporary differences between the U.S. GAAP and tax treatment of certain income and expense items. The Company must assess and make estimates regarding the likelihood that the deferred tax assets will be recovered.

 

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To the extent that it is determined the deferred tax assets will not be recovered, a valuation allowance is established for such assets. In making such a determination, the Company takes into account positive and negative evidence including projections of future taxable income and assessments of potential tax planning strategies.

The Company recognizes the tax benefit from uncertain tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of the position. The tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. Uncertain tax positions in certain foreign jurisdictions would not impact the effective foreign tax rate because unrecognized non-current tax benefits are offset by the foreign net operating loss carryforwards, which are fully reserved. The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized non-current tax benefits as part of the income tax provision.

Defined Benefit Pension Plan

Pension benefit costs and liabilities are dependent on assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, expected investment return on plan assets, mortality rates and retirement rates. These rates are reviewed annually and adjusted to reflect current conditions. These rates are determined based on reference to yields. The compensation increase rate is based on historical experience. The expected return on plan assets is derived from detailed periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks (standard deviations) and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return. Mortality and retirement rates are based on actual and anticipated plan experience. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While the Company believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect pension and postretirement obligation and future expense.

Contingencies

Environmental

Liabilities are recorded when site restoration or environmental remediation and cleanup obligations are either known or considered probable and can be reasonably estimated. Recoveries of environmental costs through insurance, indemnification arrangements or other sources are recognized when such recoveries become certain.

The Company capitalizes environmental costs only if the costs are recoverable and the costs extend the life, increase the capacity, or improve the safety or efficiency of property owned by the Company as compared with the condition of that property when originally constructed or acquired, or if the costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations or activities and the costs improve the property compared with its condition when constructed or acquired. All other environmental costs are expensed.

Other

The Company establishes a liability for all other loss contingencies when information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated.

Exit or Disposal Obligations

In the fourth quarter of 2009 and in the first half of 2010, the Company committed to cost reduction initiatives, including planned workforce reductions and restructuring of certain functions. The Company has taken these specific actions in order to more strategically align its operating, selling, general and administrative costs relative to revenues. The Company has recorded expenses related to these cost reduction initiatives for severance, lease cancellations, and other restructuring costs in accordance with FASB ASC 420-10, Exit or Disposal Cost Obligations and FASB ASC 712-10, Nonretirement Postemployment Benefits.

Under FASB ASC 420-10, costs associated with restructuring activities are generally recognized when they are incurred. In the case of leases, the expense is estimated and accrued when the property is vacated. In addition, post-employment benefits accrued for

 

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workforce reductions related to restructuring activities are accounted for under FASB ASC 712-10. A liability for post-employment benefits is generally recorded when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated. The Company continually evaluates the adequacy of the remaining liabilities under its restructuring initiatives. Although the Company believes that these estimates accurately reflect the costs of its restructuring plans, actual results may differ, thereby requiring the Company to record additional provisions or reverse a portion of such provisions.

New Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update (“ASU 2011-12”). ASU 2011-12 provides an update to ASU 2011-05, which updated existing guidance on the presentation of comprehensive income. ASU 2011-12 defers the effective date for presentation of reclassification of items out of accumulated other comprehensive income to net income. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted. The adoption of these updates in the period ended March 31, 2012, changed the presentation and provided additional details on certain consolidated financial statement information but did not have a material impact.

Off-Balance Sheet Transactions

The Company was not a party to any off-balance sheet transactions at March 31, 2012 or December 31, 2011, or for the three months ended March 31, 2012.

Inflation and Changing Prices

The Company does not operate or conduct business in hyper-inflationary countries nor enter into long-term supply contracts that may impact margins due to inflation. Changes in prices of goods and services are reflected on proposals, bids or quotes submitted to customers.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s principal market risk exposures (i.e., the risk of loss arising from the adverse changes in market rates and prices) are to changes in interest rates on the Company’s debt and investment portfolios and fluctuations in foreign currency.

The Company centrally manages its debt, considering investment opportunities and risks, tax consequences and overall financing strategies. Based on the amount of variable rate debt, $30.0 million at March 31, 2012, an increase in interest rates by one hundred basis points would increase annual interest expense by approximately $0.3 million.

A significant portion of the Company’s business is exposed to fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of the foreign operations of the Company in Australia, Bahrain, Belgium, Canada, China, Denmark, France, Germany, Malaysia, The Netherlands, New Zealand, Nigeria, Norway, Singapore, Sweden and the United Kingdom. Foreign currency exchange rate changes, primarily the Euro, the Australian Dollar and the British Pound, relative to the U.S. dollar resulted in an unfavorable impact on the Company’s U.S. dollar reported revenues for the three months ended March 31, 2012 when compared to the three months ended March 31, 2011. The revenue impact was somewhat mitigated with similar exchange effects on operating costs thereby reducing the exchange rate effect on operating income (loss). The Company does not use interest rate or foreign currency rate hedges.

Based on the three months ended March 31, 2012, foreign currency-based revenues and operating loss of $31.5 million and $1.4 million, respectively, a ten percent depreciation in all applicable foreign currencies would result in a decrease in revenues of $2.9 million and a reduction in operating loss of $0.1 million.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated, as required by Rules 13a-15(e) and 15(a)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act as of March 31, 2012. Based on that evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012 to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

31


FURMANITE CORPORATION AND SUBSIDIARIES

PART II — Other Information

Item 1. Legal Proceedings

The operations of the Company are subject to federal, state and local laws and regulations in the U.S. and various foreign locations relating to protection of the environment. Although the Company believes its operations are in compliance with applicable environmental regulations, there can be no assurance that costs and liabilities will not be incurred by the Company. The Company has recorded, in other liabilities, an undiscounted reserve for environmental liabilities related to the remediation of site contamination for properties in the U.S. in the amount of $0.9 million and $1.0 million as of March 31, 2012 and December 31, 2011, respectively. While there is a reasonable possibility due to the inherent nature of environmental liabilities that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts are material to its financial statements.

On September 19, 2011, John Daugherty filed a derivative shareholder petition in the County Court at Law No. 3, Dallas County, Texas, on behalf of the Company against certain of the Company’s directors and executive officers (collectively the “defendants”) and naming the Company as a nominal party. The petition alleges the named directors and officers breached their fiduciary responsibilities in regard to certain internal control matters. The petitioner requests that the defendants pay unspecified damages to the Company. On October 31, 2011, the defendants filed their answer in the lawsuit as well as motions to dismiss it. The defendants have informed the Company that they believe this lawsuit is without merit and intend to vigorously defend the lawsuit.

Furmanite America, Inc., a subsidiary of the Company, is involved in disputes with a customer, INEOS USA LLC, who is negotiating with a governmental regulatory agency and claims that the subsidiary failed to provide them with satisfactory services at the customer’s facilities. On April 17, 2009, the customer initiated legal action against the subsidiary in the Common Pleas Court of Allen County, Ohio, alleging that the subsidiary and one of its former employees, who performed data services at one of the customer’s facilities, breached its contract with the customer and failed to provide the customer with adequate and timely information to support the subsidiary’s work at the customer’s facility from 1998 through the second quarter of 2005. The customer’s complaint seeks damages in an amount that the subsidiary believes represents the total proposed civil penalty, plus the cost of unspecified supplemental environmental projects requested by the regulatory agency to reduce air emissions at the customer’s facility, and also seeks unspecified punitive damages. The subsidiary believes that it provided the customer with adequate and timely information to support the subsidiary’s work at the customer’s facilities and will vigorously defend against the customer’s claim.

The Company has contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes, after consulting with counsel, that the ultimate resolution of such contingencies will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.

While the Company cannot make an assessment of the eventual outcome of all of these matters or determine the extent, if any, of any potential uninsured liability or damage, reserves of $1.3 million, which include the Furmanite America, Inc. litigation, were recorded in accrued expenses and other current liabilities as of March 31, 2012 and December 31, 2011. While there is a reasonable possibility that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts are material to its financial statements.

Item 1A. Risk Factors

During the quarter ended March 31, 2012, there were no material changes to the risk factors reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

32


Item 6. Exhibits

 

3.1   

Restated Certificate of Incorporation of the Registrant, dated September 26, 1979, incorporated by reference herein to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-16.

3.2   

Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated April 30, 1981, incorporated by reference herein to Exhibit 3.2 to the Registrant’s Form 10-K for the year ended December 31, 1981.

3.3   

Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated May 28, 1985, incorporated by reference herein to Exhibit 4.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 1985.

3.4   

Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated September 17, 1985, incorporated by reference herein to Exhibit 4.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 1985.

3.5   

Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated July 10, 1990, incorporated by reference herein to Exhibit 3.5 to the Registrant’s Form 10-K for the year ended December 31, 1990.

3.6   

Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated September 21, 1990, incorporated by reference herein to Exhibit 3.5 to the Registrant’s Form 10-Q for the quarter ended September 30, 1990.

3.7   

Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated August 8, 2001, incorporated by reference herein to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 22, 2001.

3.8   

By-laws of the Registrant, as amended and restated June 14, 2007, filed as Exhibit 3.8 to the Registrant’s 10-K for the year then ended December 31, 2007, which exhibit is hereby incorporated by reference.

4.1   

Certificate of Designation, Preferences and Rights related to the Registrant’s Series B Junior Participating Preferred Stock, filed as Exhibit 4.2 to the Registrant’s 10-K for the year ended December 31, 2008, which exhibit is incorporated herein by reference.

4.2   

Rights Agreement, dated as of April 15, 2008, between the Registrant and The Bank of New York Trust Company, N.A., a national banking association, as Rights Agent, which includes as exhibits, the Form of Rights Certificate and the Summary of Rights to Purchase Stock, filed as Exhibit 4.1 to the Registrant’s Form 8-A/A filed on April 18, 2008, which exhibit is incorporated herein by reference.

4.3   

Letters to stockholders of the Registrant, dated April 19, 2008 (incorporated by reference herein to Exhibit 4.2 to the Registrant’s Form 8-A/A filed on April 18, 2008).

10.1   

Credit Agreement, dated as of March 5, 2012, among Furmanite Worldwide, Inc. and certain subsidiaries, as Borrowers, JPMorgan Chase, N.A., as Administrative Agent, Wells Fargo Bank, N.A. as Syndication Agent and the Lenders party thereto, incorporated by reference herein to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2012.

10.2   

Guaranty and Collateral Agreement, dated as of March 5, 2012, among Furmanite Worldwide, Inc. and each of the other grantors (as defined therein) in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference herein to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2012.

10.3   

Parent Pledge Agreement, dated as of March 5, 2012, made by Furmanite Corporation in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference herein to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 6, 2012.

31.1*   

Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of May 7, 2012.

31.2*   

Certification of Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of May 7, 2012.

32.1*   

Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of May 7, 2012.

 

33


32.2*   Certification of Principal Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of May 7, 2012.
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.DEF**   XBRL Taxonomy Definition Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

*

Filed herewith.

**

These exhibits are furnished herewith. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

34


Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FURMANITE CORPORATION

(Registrant)

/s/ ROBERT S. MUFF

Robert S. Muff

Chief Accounting Officer
(Principal Financial and Accounting Officer)

Date: May 7, 2012

 

35

XNYS:FRM Furmanite Corp Quarterly Report 10-Q Filling

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