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EX-31.2 - EX-31.2 - FURMANITE CORP | d82119exv31w2.htm |
EX-32.2 - EX-32.2 - FURMANITE CORP | d82119exv32w2.htm |
EX-31.1 - EX-31.1 - FURMANITE CORP | d82119exv31w1.htm |
EX-32.1 - EX-32.1 - FURMANITE CORP | d82119exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to |
Commission File Number 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.) | |
2435 North Central Expressway | ||
Suite 700 | ||
Richardson, Texas | 75080 | |
(Address of principal executive offices) | (Zip Code) |
(972) 699-4000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former
Fiscal year, if changed since last report)
(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.
þYes
o
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).
o Yes o 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.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 36,946,656 shares of the registrants common stock outstanding as of May 4, 2011.
FURMANITE CORPORATION AND SUBSIDIARIES
INDEX
INDEX
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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. All statements other than statements of historical facts included
in this report, including, but not limited to, statements regarding the Companys 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.
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 33,121 | $ | 37,170 | ||||
Accounts receivable, trade (net of allowance for doubtful
accounts of $1,672 and $1,497
as of March 31, 2011 and December 31, 2010, respectively) |
68,099 | 63,630 | ||||||
Inventories, net of reserve: |
||||||||
Raw materials and supplies |
19,041 | 17,375 | ||||||
Work-in-process |
8,242 | 6,906 | ||||||
Finished goods |
207 | 85 | ||||||
Prepaid expenses and other current assets |
6,844 | 5,951 | ||||||
Total current assets |
135,554 | 131,117 | ||||||
Property and equipment |
80,451 | 73,969 | ||||||
Less: accumulated depreciation and amortization |
(45,761 | ) | (43,249 | ) | ||||
Property and equipment, net |
34,690 | 30,720 | ||||||
Goodwill |
14,338 | 13,148 | ||||||
Deferred tax assets |
2,955 | 2,872 | ||||||
Intangible and other assets |
8,792 | 4,244 | ||||||
Total assets |
$ | 196,329 | $ | 182,101 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 2,723 | $ | 76 | ||||
Accounts payable |
18,221 | 17,815 | ||||||
Accrued expenses and other current liabilities |
27,132 | 24,488 | ||||||
Income taxes payable |
190 | 557 | ||||||
Total current liabilities |
48,266 | 42,936 | ||||||
Long-term debt, non-current |
32,797 | 30,085 | ||||||
Net pension liability |
8,695 | 8,432 | ||||||
Other liabilities |
2,552 | 2,560 | ||||||
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; 40,955,619 and
40,925,619 shares
issued as of March 31, 2011 and December 31, 2010, respectively |
4,745 | 4,745 | ||||||
Additional paid-in capital |
132,338 | 132,132 | ||||||
Accumulated deficit |
(8,347 | ) | (12,373 | ) | ||||
Accumulated other comprehensive loss |
(6,704 | ) | (8,403 | ) | ||||
Treasury stock, at cost (4,008,963 shares as of March 31, 2011 and December
31, 2010) |
(18,013 | ) | (18,013 | ) | ||||
Total stockholders equity |
104,019 | 98,088 | ||||||
Total liabilities and stockholders equity |
$ | 196,329 | $ | 182,101 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share data)
(Unaudited)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
$ | 73,054 | $ | 66,435 | ||||
Costs and expenses: |
||||||||
Operating costs (exclusive of depreciation and amortization) |
50,443 | 45,662 | ||||||
Depreciation and amortization expense |
1,875 | 1,549 | ||||||
Selling, general and administrative expense |
16,911 | 18,763 | ||||||
Total costs and expenses |
69,229 | 65,974 | ||||||
Operating income |
3,825 | 461 | ||||||
Interest income and other income (expense), net |
122 | 342 | ||||||
Interest expense |
(240 | ) | (241 | ) | ||||
Income before income taxes |
3,707 | 562 | ||||||
Income tax benefit (expense) |
319 | (171 | ) | |||||
Net income |
$ | 4,026 | $ | 391 | ||||
Earnings per common share: |
||||||||
Basic |
$ | 0.11 | $ | 0.01 | ||||
Diluted |
$ | 0.11 | $ | 0.01 | ||||
Weighted-average number of common and common equivalent shares used in computing net income per common share: |
||||||||
Basic |
36,925 | 36,689 | ||||||
Diluted |
37,264 | 36,809 |
The accompanying notes are an integral part of these consolidated financial statements.
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FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Three Months Ended March 31, 2011 (Unaudited) and Year Ended December 31, 2010
(in thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Common Shares | Common | Paid-In | Accumulated | Comprehensive | Treasury | |||||||||||||||||||||||||||
Issued | Treasury | Stock | Capital | Deficit | Loss | Stock | Total | |||||||||||||||||||||||||
Balances at January 1, 2010 |
40,682,815 | 4,008,963 | $ | 4,723 | $ | 132,106 | $ | (21,859 | ) | $ | (11,627 | ) | $ | (18,013 | ) | $ | 85,330 | |||||||||||||||
Net income |
| | | | 9,486 | | | 9,486 | ||||||||||||||||||||||||
Stock-based compensation and stock
option exercises |
242,804 | | 22 | 1,469 | | | | 1,491 | ||||||||||||||||||||||||
Change in pension net actuarial loss and
prior service credit, net of tax |
| | | | | 3,484 | | 3,484 | ||||||||||||||||||||||||
Other |
(1,443 | ) | (1,443 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | | (260 | ) | | (260 | ) | ||||||||||||||||||||||
Balances at December 31, 2010 |
40,925,619 | 4,008,963 | $ | 4,745 | $ | 132,132 | $ | (12,373 | ) | $ | (8,403 | ) | $ | (18,013 | ) | $ | 98,088 | |||||||||||||||
Net income |
| | | | 4,026 | | | 4,026 | ||||||||||||||||||||||||
Stock-based compensation and stock
option exercises |
30,000 | | | 206 | | | | 206 | ||||||||||||||||||||||||
Change in pension net actuarial loss and
prior service credit, net of tax |
| | | | | (225 | ) | | (225 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | | 1,924 | | 1,924 | ||||||||||||||||||||||||
Balances at March 31, 2011 |
40,955,619 | 4,008,963 | $ | 4,745 | $ | 132,338 | $ | (8,347 | ) | $ | (6,704 | ) | $ | (18,013 | ) | $ | 104,019 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 4,026 | $ | 391 | ||||
Reconciliation of net income to net cash used in
operating activities: |
||||||||
Depreciation and amortization |
1,875 | 1,549 | ||||||
Provision for doubtful accounts |
101 | 112 | ||||||
Deferred income taxes |
(1,217 | ) | 35 | |||||
Stock-based compensation expense |
206 | 350 | ||||||
Other, net |
225 | 136 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(4,323 | ) | (930 | ) | ||||
Inventories |
(2,918 | ) | (1,241 | ) | ||||
Prepaid expenses and other current assets |
(616 | ) | 672 | |||||
Accounts payable |
462 | 200 | ||||||
Accrued expenses and other current liabilities |
2,575 | (2,587 | ) | |||||
Income taxes payable |
(341 | ) | (588 | ) | ||||
Other, net |
(80 | ) | (47 | ) | ||||
Net cash used in operating activities |
(25 | ) | (1,948 | ) | ||||
Investing activities: |
||||||||
Capital expenditures |
(759 | ) | (2,365 | ) | ||||
Acquisition
of assets and business, net of cash acquired of $1,078 in 2011 |
(3,921 | ) | (200 | ) | ||||
Proceeds from sale of assets |
32 | 164 | ||||||
Net cash used in investing activities |
(4,648 | ) | (2,401 | ) | ||||
Financing activities: |
||||||||
Payments on debt |
(35 | ) | (52 | ) | ||||
Net cash used in financing activities |
(35 | ) | (52 | ) | ||||
Effect of exchange rate changes on cash |
659 | (298 | ) | |||||
Decrease in cash and cash equivalents |
(4,049 | ) | (4,699 | ) | ||||
Cash and cash equivalents at beginning of period |
37,170 | 36,117 | ||||||
Cash and cash equivalents at end of period |
$ | 33,121 | $ | 31,418 | ||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ | 192 | $ | 200 | ||||
Cash paid for income taxes, net of refunds received |
$ | 936 | $ | 596 | ||||
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.
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FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
(Unaudited)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 4,026 | $ | 391 | ||||
Other comprehensive income (loss): |
||||||||
Change in pension net actuarial loss and prior service credit, net of tax |
(225 | ) | 932 | |||||
Foreign currency translation adjustments |
1,924 | (2,200 | ) | |||||
Total other comprehensive income (loss) |
1,699 | (1,268 | ) | |||||
Comprehensive income (loss) |
$ | 5,725 | $ | (877 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
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FURMANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
March 31, 2011
(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 Companys Annual Report on Form 10-K for the
year ended December 31, 2010 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 based primarily on time and materials. Substantially all projects are generally short
term in nature. Revenues are recognized when persuasive evidence of an arrangement exists, services
to customers have been rendered or products have been delivered and risk of ownership has passed to
the customer, the selling price is fixed or determinable and collectability is reasonably assured.
Revenues are recorded, net of sales tax. The Company provides limited warranties to customers,
depending upon the service performed. Warranty claim costs were not material during the three
months ended March 31, 2011 or 2010.
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 excess and obsolete reserve was $1.7 million and $1.8 million at
March 31, 2011 and December 31, 2010, respectively. Inventories consumed or products sold are
included in operating costs.
New Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update 2010-06, Improving Disclosures about
Fair Value Measurements (ASU 2010-06). ASU 2010-06 provides more robust disclosures about the
transfers between Levels 1 and 2, the activity in Level 3 fair value measurements and clarifies the
level of disaggregation and disclosure related to the valuation techniques and inputs used. The new
disclosures are effective for interim and annual reporting periods beginning after December 15,
2009, except for the Level 3 activity disclosures, which are effective for fiscal years beginning
after December 15, 2010. There was not a material impact from the adoption of this guidance on the
Companys consolidated financial statements.
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 $9.2 million, net of cash acquired of $1.1
million. SLM provides large scale on-site machining, which includes engineering, fabrication and
execution of highly-specialized machining solutions for large-scale equipment or operations.
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In connection with the SLM acquisition, on February 23, 2011, FWI entered into a consent and waiver
agreement under its credit agreement. See Note 6, Long-Term Debt, to these consolidated financial
statements for additional information as it relates to the credit agreement. 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 $5.3 million.
The final determinations of fair value for certain assets and liabilities remain subject to change
based on final valuations of the assets acquired and liabilities assumed. The following amounts
represent the preliminary determination of the fair value of the assets acquired and liabilities
assumed (in thousands):
Fair value of net assets acquired
Cash |
$ | 1,078 | ||
Accounts receivable |
224 | |||
Prepaid expenses and other current assets |
123 | |||
Property and equipment |
4,450 | |||
Goodwill 1 |
1,190 | |||
Intangible and other assets 2 |
4,525 | |||
Accrued expenses and other current liabilities |
(100 | ) | ||
Deferred tax liabilities |
(1,190 | ) | ||
Fair value of net assets acquired |
$ | 10,300 | ||
1 | Goodwill consists of intangible assets that do not qualify for separate recognition and is not expected to be deductible for tax purposes. | |
2 | Intangible assets are primarily comprised of trademarks, patents, and non-compete arrangements. Other assets consist of acquired interests in equity and cost method investments. |
The SLM acquisition is insignificant to the Companys financial position and results of
operations, therefore, SLMs pro forma results would not have a significant impact on the
Companys results had the acquisition occurred at the beginning of the current or previous year.
3. Earnings Per Share
Basic earnings per share are calculated as net income divided by the weighted-average number of
shares of common stock and restricted stock outstanding during the period. Diluted earnings 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 per share reflect the
dilutive effect of common stock equivalents including options to purchase shares of common stock,
using the treasury stock method.
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Basic and diluted weighted-average common shares outstanding and earnings per share include the
following (in thousands, except per share data):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 4,026 | $ | 391 | ||||
Basic weighted-average common shares outstanding |
36,925 | 36,689 | ||||||
Dilutive effect of common stock equivalents |
339 | 120 | ||||||
Diluted weighted-average common shares outstanding |
37,264 | 36,809 | ||||||
Earnings per share: |
||||||||
Basic |
$ | 0.11 | $ | 0.01 | ||||
Dilutive |
$ | 0.11 | $ | 0.01 | ||||
Stock options excluded from diluted weighted-average common shares
outstanding because their inclusion would have an anti-dilutive effect: |
309 | 605 |
4. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Compensation and benefits1 |
$ | 18,138 | $ | 15,130 | ||||
Estimated potential uninsured liability claims |
1,886 | 1,886 | ||||||
Value added tax payable |
1,431 | 1,387 | ||||||
Taxes other than income |
1,523 | 1,052 | ||||||
Professional, audit and legal fees |
649 | 1,088 | ||||||
Customer deposit |
740 | 615 | ||||||
Other employee related expenses |
234 | 550 | ||||||
Rent |
360 | 327 | ||||||
Interest |
39 | 20 | ||||||
Other2 |
2,132 | 2,433 | ||||||
$ | 27,132 | $ | 24,488 | |||||
1 | Includes restructuring accruals of $0.5 million and $1.1 million as of March 31, 2011 and December 31, 2010, respectively. | |
2 | Includes restructuring accruals of $0.5 million at each of March 31, 2011 and December 31, 2010. |
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
Companys operating, selling, general and administrative costs relative to revenues.
2009 Cost Reduction Initiative
The Company completed this cost reduction initiative during 2010 and incurred total costs since
inception of approximately $3.4 million. During the first quarter of 2010, the Company recorded
$1.9 million in restructuring charges of which $0.7 million and $1.2 million are included in
operating costs and selling, general and administrative expenses, respectively. No costs were
incurred during 2011 related to this initiative.
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2010 Cost Reduction Initiative
During the second quarter of 2010, the Company committed to an additional cost reduction
initiative, primarily related to the restructuring of certain functions within the Companys EMEA
operations (which includes operations in Europe, the Middle East and Africa). 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. For the three months ended March 31, 2011, restructuring costs incurred of $41 thousand
and $47 thousand are included in operating costs 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, 2011, the costs incurred since the inception
of this cost reduction initiative totaled approximately $3.5 million, with the remaining
$0.5 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 cost reduction initiatives for the three
months ended March 31, 2011, is as follows (in thousands):
Reserve at | ||||||||||||||||||||
December 31, | Foreign currency | Reserve at | ||||||||||||||||||
2010 | Charges | Cash payments | adjustments | March 31, 2011 | ||||||||||||||||
2009 Initiative |
||||||||||||||||||||
Severance and benefit costs |
$ | 107 | $ | | $ | (110 | ) | $ | 3 | $ | | |||||||||
Lease termination costs |
125 | | | 4 | 129 | |||||||||||||||
Other restructuring costs |
9 | | | 1 | 10 | |||||||||||||||
2010 Initiative |
||||||||||||||||||||
Severance and benefit costs |
969 | 84 | (601 | ) | 47 | 499 | ||||||||||||||
Lease termination costs |
277 | (2 | ) | (9 | ) | 18 | 284 | |||||||||||||
Other restructuring costs |
90 | 6 | (25 | ) | 6 | 77 | ||||||||||||||
$ | 1,577 | $ | 88 | $ | (745 | ) | $ | 79 | $ | 999 | ||||||||||
Restructuring costs associated with the cost reduction initiatives consist of the following
(in thousands):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Severance and benefit costs |
$ | 84 | $ | 1,186 | ||||
Lease termination costs |
(2 | ) | 316 | |||||
Other restructuring costs |
6 | 352 | ||||||
$ | 88 | $ | 1,854 | |||||
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Restructuring costs were incurred in the following geographical areas (in thousands):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Americas |
$ | | $ | 186 | ||||
EMEA |
88 | 1,668 | ||||||
$ | 88 | $ | 1,854 | |||||
Total workforce reductions related to the cost reduction initiatives included terminations for
165 employees, which include reductions of 31 employees in the Americas (which includes operations
in North America, South America and Latin America), 133 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, | |||||||
2011 | 2010 | |||||||
Borrowings under the revolving credit facility (the Credit Agreement) |
$ | 30,000 | $ | 30,000 | ||||
Capital leases |
128 | 161 | ||||||
Notes payable (the Notes) |
5,392 | | ||||||
Total long-term debt |
35,520 | 30,161 | ||||||
Less: current portion of long-term debt |
(2,723 | ) | (76 | ) | ||||
Total long-term debt, non-current |
$ | 32,797 | $ | 30,085 | ||||
On August 4, 2009, FWI and certain foreign subsidiaries of FWI (the designated borrowers)
entered into a credit agreement dated July 31, 2009 with a banking syndicate comprising Bank of
America, N.A. and Compass Bank (the Credit Agreement). The Credit Agreement, which matures on
January 31, 2013, provides a revolving credit facility of up to $50.0 million. A portion of the
amount available under the 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 Credit
Agreement (not in excess of $5.0 million in the aggregate) is available for swing line loans to
FWI. The loans outstanding under the Credit Agreement may not exceed $35.0 million in the aggregate
to the designated borrowers.
At each of March 31, 2011 and December 31, 2010, $30.0 million was outstanding under the Credit
Agreement. Borrowings under the 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 EBITDA
ratio (as defined in the Credit Agreement)) which was 2.3% at each of March 31, 2011 and
December 31, 2010. The Credit Agreement contains a commitment fee, which ranges between 0.25% to
0.30% based on the funded debt to EBITDA ratio, and was 0.25% at each of March 31, 2011 and
December 31, 2010, based on the unused portion of the amount available under the Credit Agreement.
All obligations under the 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 certain of
FWI and its subsidiaries assets (which approximates $144.1 million of current assets and property
and equipment as of March 31, 2011) and is without recourse to the Parent Company. FWI is subject
to certain compliance provisions including, but not limited to, maintaining certain funded debt and
fixed charge coverage ratios, tangible asset concentration levels, and capital expenditure
limitations as well as restrictions on indebtedness, guarantees, dividends and other contingent
obligations and transactions. Events of default under the Credit Agreement include customary
events, such as change of control, breach of covenants or breach of representations and warranties.
At March 31, 2011, FWI was in compliance with all covenants under the Credit Agreement.
Considering the outstanding borrowings of $30.0 million, and $1.0 million related to outstanding
letters of credit, the unused borrowing capacity under the Credit Agreement was $19.0 million at
March 31, 2011, with a limit of $5.0 million of this capacity remaining for the designated
borrowers.
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In connection with the acquisition of SLM, on February 23, 2011, FWI entered into a consent and
waiver agreement as it relates to the 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 $5.3 million ($2.9 million denominated in U.S. dollar and
$2.4 million denominated in Australian dollar) payable in two
annual installments, which mature on
February 23, 2013. All obligations under the Notes are secured by a first priority lien on the assets acquired in the acquisition. At March 31, 2011, $5.4 million was outstanding under the Notes. The Notes bear
interest at a fixed rate of 2.5% per annum.
7. Retirement Plan
Two of the Companys 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). Since the Norwegian Plan represents approximately two
percent of the Companys total pension plan assets and three percent of total pension plan
liabilities, only the schedule of net periodic pension cost includes combined amounts from the two
plans, while assumption and narrative information relates solely to the U.K. Plan.
Net periodic pension cost for the U.K. and Norwegian Plans includes the following components (in
thousands):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Service cost |
$ | 230 | $ | 207 | ||||
Interest cost |
971 | 900 | ||||||
Expected return on plan assets |
(945 | ) | (882 | ) | ||||
Amortization of prior service cost |
(25 | ) | (23 | ) | ||||
Amortization of net actuarial loss |
165 | 266 | ||||||
Net periodic pension cost |
$ | 396 | $ | 468 | ||||
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: 6.3% overall, 7.8% for
equities and 4.7% for bonds. Estimated annual pension plan contributions are assumed to be
consistent with the current expected contribution level of $0.8 million for 2011.
8. Stock-Based Compensation
The Company has stock option plans and agreements which allow for the issuance of stock options,
restricted stock awards and stock appreciation rights. For the three months ended March 31, 2011
and 2010, the total compensation cost charged against income and included in selling, general and
administrative expenses for stock-based compensation arrangement was $0.2 million and $0.4 million,
respectively. The expense for the three months ended March 31, 2010 included $0.2 million
associated with accelerated vesting of awards in connection with the retirement of the former
Chairman and Chief Executive Officer of the Company. Tax effects from stock-based compensation are
insignificant due to the Companys current domestic tax position. During 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 Companys
share-based compensation plan and treasury stock for issuances outside of the plan. As of March 31,
2011, the total unrecognized compensation expense related to stock options and restricted stock
awards was $1.9 million and $0.4 million, respectively.
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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, | |||||||
2011 | 2010 | |||||||
Net actuarial loss and prior service credit |
$ | (13,274 | ) | $ | (12,965 | ) | ||
Less: deferred tax benefit |
3,622 | 3,538 | ||||||
Net of tax |
(9,652 | ) | (9,427 | ) | ||||
Foreign currency translation adjustment |
2,948 | 1,024 | ||||||
Total accumulated other comprehensive loss |
$ | (6,704 | ) | $ | (8,403 | ) | ||
10. Income Taxes
The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in
accordance with the provisions of FASB ASC 740, Income Taxes (ASC 740). As a result,
substantially all domestic federal income taxes, as well as certain state and foreign income taxes,
recorded for the three months ended March 31, 2011 and 2010 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. The income tax expense recorded for
the three months ended March 31, 2010 consisted primarily of income tax expenses in foreign and
state jurisdictions in which the Company operates.
Income tax expense differs from the expected tax at statutory rates due primarily to the change in
valuation allowance for 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. In concluding that a full valuation allowance on domestic
federal and certain state and foreign income taxes was required, the Company primarily considered
such factors as the history of operating losses and the nature of the deferred tax assets. Interim
period income tax expense or benefit is computed at the estimated annual effective tax rate, unless
adjusted for specific discrete items as required.
Income tax benefit as a percentage of income before income taxes was approximately 8.6% for the
three months ended March 31, 2011 as compared to income tax expense as a percentage of income
before income taxes of approximately 30.4% for the three months ended March 31, 2010. 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 change in the income tax rates between periods is
related to a lower level of pre-tax income in 2010 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, 2011 or 2010.
Unrecognized tax benefits at each of March 31, 2011 and December 31, 2010 of $0.8 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.
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A reconciliation of the change in the unrecognized tax benefits for the three months ended March
31, 2011 is as follows (in thousands):
Balance at December 31, 2010 |
$ | 803 | ||
Additions based on tax positions |
43 | |||
Balance at March 31, 2011 |
$ | 846 | ||
11. Commitments and Contingencies
The operations of the Company are subject to federal, state and local laws and regulations in the
United States 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 United States in the amount of $1.1
million and $1.2 million at March 31, 2011 and December 31, 2010, respectively.
Furmanite America, Inc., a subsidiary of the Company, is involved in disputes with two customers,
who are each negotiating with a governmental regulatory agency and claim that the subsidiary failed
to provide them with satisfactory services at the customers facilities. On April 17, 2009, a
customer, INEOS USA LLC, 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 customers facilities, breached its contract with the customer and
failed to provide the customer with adequate and timely information to support the subsidiarys
work at the customers facility from 1998 through the second quarter of 2005. The customers
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 customers facility, and also seeks unspecified
punitive damages. The subsidiary believes that it provided the customer with adequate and timely
information to support the subsidiarys work at the customers facilities and will vigorously
defend against the customers claim.
In the first quarter of 2008, a subsidiary of the Company filed an action seeking to vacate a $1.35
million arbitration award related to a sales brokerage agreement associated with a business that
the subsidiary sold in 2005. The subsidiary believed that the sales broker was an affiliate of
another company that in 2006 settled all of its claims, as well as all of the claims of its
affiliates, against the subsidiary. The action to vacate the arbitration award terminated and, in
January 2010, the subsidiary paid the full amount of the arbitration award plus accrued interest to
the sales broker which was accrued as of December 31, 2009. In separate actions, the subsidiary was
seeking to enforce the prior settlement agreement executed by the sales brokers affiliate and
obtain an equitable offset of the arbitration award, however, upon mutual agreement by all parties,
these separate actions were dismissed by the court in July 2010.
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 $1.9
million were recorded in accrued expenses and other current liabilities as of March 31, 2011 and
December 31, 2010.
12. Business Segment Data and Geographical Information
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 decision maker, or
decision-making group, in deciding how to allocate resources and in assessing performance. For
financial reporting purposes, the Company operates in a single segment.
The Company provides 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.
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Geographical areas are the Americas, EMEA and Asia-Pacific. The following geographical area
information includes revenues by major service line based on the physical location of the
operations (in thousands):
Asia- | ||||||||||||||||
Americas | EMEA | Pacific | Total | |||||||||||||
Three months ended March 31, 2011: |
||||||||||||||||
On-line services |
$ | 15,945 | $ | 9,470 | $ | 2,509 | $ | 27,924 | ||||||||
Off-line services |
18,364 | 10,096 | 4,040 | 32,500 | ||||||||||||
Other services |
5,918 | 5,107 | 1,605 | 12,630 | ||||||||||||
Total revenues |
$ | 40,227 | $ | 24,673 | $ | 8,154 | $ | 73,054 | ||||||||
Three months ended March 31, 2010: |
||||||||||||||||
On-line services |
$ | 11,378 | $ | 9,555 | $ | 4,064 | $ | 24,997 | ||||||||
Off-line services |
15,363 | 10,636 | 3,718 | 29,717 | ||||||||||||
Other services |
4,826 | 6,070 | 825 | 11,721 | ||||||||||||
Total revenues |
$ | 31,567 | $ | 26,261 | $ | 8,607 | $ | 66,435 | ||||||||
Historically, the Company has not allocated headquarter costs to its operating locations.
However, if the headquarter costs had been allocated to all the operating locations based on their
respective revenues, the operating income by geographical area based on physical location would
have been as follows (in thousands):
Asia- | ||||||||||||||||
Americas | EMEA | Pacific | Total | |||||||||||||
Three months ended March 31, 2011: |
||||||||||||||||
Operating income1 |
$ | 2,580 | $ | 762 | $ | 483 | $ | 3,825 | ||||||||
Allocation of headquarter costs |
1,453 | (1,096 | ) | (357 | ) | | ||||||||||
Adjusted operating income (loss) |
$ | 4,033 | $ | (334 | ) | $ | 126 | $ | 3,825 | |||||||
Three months ended March 31, 2010: |
||||||||||||||||
Operating income (loss)2 |
$ | (684 | ) | $ | (636 | ) | $ | 1,781 | $ | 461 | ||||||
Allocation of headquarter costs |
2,130 | (1,610 | ) | (520 | ) | | ||||||||||
Adjusted operating income (loss) |
$ | 1,446 | $ | (2,246 | ) | $ | 1,261 | $ | 461 | |||||||
1 | Includes restructuring charges of $0.1 million in EMEA. | |
2 | Includes restructuring charges totaling $0.2 million and $1.7 million in the Americas and EMEA, respectively. |
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, | December 31, | |||||||
2011 | 2010 | |||||||
Americas |
$ | 20,832 | $ | 17,311 | ||||
EMEA |
12,473 | 12,092 | ||||||
Asia-Pacific |
7,130 | 3,493 | ||||||
$ | 40,435 | $ | 32,896 | |||||
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
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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. | ||
| Level 3 Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entitys 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, 2011
and December 31, 2010 approximated the carrying value. These fair values were estimated based on
the Companys 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, 2011, as the Companys accounts receivable are generated from these business
industries with customers located throughout the Americas, EMEA and Asia-Pacific.
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FURMANITE CORPORATION AND SUBSIDIARIES
Item 2. Managements 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 Companys 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 heat exchanger design, manufacture and
repair, smart shim services, concrete repair and valve and other product manufacturing. These
products and services are provided primarily to electric power generating plants, petroleum
refineries, which include refineries and offshore drilling rigs (including subsea) 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, 2011, consolidated revenues increased by $6.6 million compared
to the three months ended March 31, 2010, primarily related to increases in leak sealing, line
stopping and bolting services in the Americas. The Companys net income for the three months ended
March 31, 2011 increased by $3.6 million compared to the three months ended March 31, 2010. The
increase in net income was a result of the increase in revenues for the current year three month
period, as well as operational improvements realized as a result of the cost reduction initiatives
which began in late 2009 and continued throughout 2010.
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 Companys 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 to result in annual cost reductions at historical activity levels of approximately
$11.0 million, primarily compensation expenses, which will favorably impact 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 Companys 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, 2011, restructuring costs of $3.5 million have been incurred
since the inception of this additional cost reduction initiative, with the remaining $0.5 million
expected to be incurred during 2011. The Company estimates the effects of this initiative to result
in annual cost reductions at historical activity levels of approximately $5.0 million, primarily
compensation expenses, of which approximately half will affect operating costs with the other half
impacting selling, general and administrative expenses.
As a result of these two initiatives, total restructuring costs negatively impacted operating
income and net income by $0.1 million for the three months ended March 31, 2011 and by $1.9 million
and $1.6 million, respectively, for the three months ended March 31, 2010.
The Companys diluted earnings per share for the three months ended March 31, 2011 increased to
$0.11 from $0.01 for the three months ended March 31, 2010.
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Results of Operations
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands, except | ||||||||
per share data) | ||||||||
Revenues |
$ | 73,054 | $ | 66,435 | ||||
Costs and expenses: |
||||||||
Operating costs (exclusive of depreciation
and amortization) |
50,443 | 45,662 | ||||||
Depreciation and amortization expense |
1,875 | 1,549 | ||||||
Selling, general and administrative expense |
16,911 | 18,763 | ||||||
Total costs and expenses |
69,229 | 65,974 | ||||||
Operating income |
3,825 | 461 | ||||||
Interest income and other income (expense), net |
122 | 342 | ||||||
Interest expense |
(240 | ) | (241 | ) | ||||
Income before income taxes |
3,707 | 562 | ||||||
Income tax benefit (expense) |
319 | (171 | ) | |||||
Net income |
$ | 4,026 | $ | 391 | ||||
Earnings per share: |
||||||||
Basic |
$ | 0.11 | $ | 0.01 | ||||
Diluted |
$ | 0.11 | $ | 0.01 |
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Geographical Information
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Revenues: |
||||||||
Americas |
$ | 40,227 | $ | 31,567 | ||||
EMEA |
24,673 | 26,261 | ||||||
Asia-Pacific |
8,154 | 8,607 | ||||||
Total revenues |
73,054 | 66,435 | ||||||
Costs and expenses: |
||||||||
Operating costs (exclusive of depreciation and amortization) |
||||||||
Americas |
27,104 | 20,764 | ||||||
EMEA |
17,717 | 19,927 | ||||||
Asia-Pacific |
5,622 | 4,971 | ||||||
Total operating costs (exclusive of depreciation and amortization) |
50,443 | 45,662 | ||||||
Operating costs as a percentage of revenue |
69.0 | % | 68.7 | % | ||||
Depreciation and amortization expense |
||||||||
Americas, including corporate |
1,029 | 812 | ||||||
EMEA |
504 | 467 | ||||||
Asia-Pacific |
342 | 270 | ||||||
Total depreciation and amortization expense |
1,875 | 1,549 | ||||||
Depreciation and amortization expense as a percentage of revenue |
2.6 | % | 2.3 | % | ||||
Selling, general and administrative expense |
||||||||
Americas, including corporate |
9,514 | 10,675 | ||||||
EMEA |
5,690 | 6,503 | ||||||
Asia-Pacific |
1,707 | 1,585 | ||||||
Total selling general and administrative expense |
16,911 | 18,763 | ||||||
Selling, general and administrative expense as a percentage of revenue |
23.1 | % | 28.2 | % | ||||
Total costs and expenses |
$ | 69,229 | $ | 65,974 | ||||
Geographical areas, based on physical location, are the Americas, EMEA and Asia-Pacific. The
following discussion and analysis, as it relates to geographic information, excludes any allocation
of headquarter costs to EMEA or Asia-Pacific.
Revenues
For the three months ended March 31, 2011, consolidated revenues increased by $6.6 million, or
9.9%, to $73.0 million, compared to $66.4 million for the three months ended March 31, 2010.
Changes related to foreign currency exchange rates favorably impacted revenues by $1.7 million, of
which $0.2 million, $0.6 million and $0.9 million were related to favorable impacts in the
Americas, EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact,
revenues increased by $4.9 million, or 7.4%, for the three months ended March 31, 2011 compared to
the same period in the prior year. This $4.9 million increase in revenues consisted of an increase
of $8.5 million in the Americas, which was partially offset by decreases of $2.2 million and $1.4
million in Asia-Pacific and EMEA, respectively. The increase in revenues in the Americas was
primarily due to volume increases in on-line services, which included volume increases in leak
sealing and line stopping services resulting in an approximate 34% increase in these revenues when
compared to the same period in the prior year. In addition, off-line revenues in the Americas
increased related to volume increases in bolting services of approximately 9% when compared to the
same period in prior year. The decrease in revenues in Asia-Pacific was primarily related to volume
decreases in on-line services, which included volume decreases in hot tapping services resulting in
an approximate 38% decrease in hot tapping services when compared to the same period in the prior
year. The decrease in revenues in EMEA was primarily attributable to decreases within other
services,
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which related to volume decreases in product and manufacturing revenues and resulted in
an approximate 17% decrease in these revenues as compared to the same period in the prior year.
Operating Costs (exclusive of depreciation and amortization)
For the three months ended March 31, 2011, operating costs increased $4.7 million, or 10.3%, to
$50.4 million, compared to $45.7 million for the three months ended March 31, 2010. Changes related
to foreign currency exchange rates unfavorably impacted costs by $1.1 million, of which $0.1
million, $0.4 million and $0.6 million were related to unfavorable impacts in the Americas, EMEA
and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, operating
costs increased by $3.6 million, or 7.9%, for the three months ended March 31, 2011, compared to
the same period in the prior year. This change consisted of a $6.2 million increase in the Americas which was partially offset by a $2.6 million decrease in
EMEA. The increase in operating costs in the Americas was primarily attributable to an increase in
labor and material costs of approximately 25% and was associated with the increase in revenues when
compared to the same period in the prior year. The decrease in EMEA was due to decreases in
material and labor costs of 7% associated with the cost reduction initiatives and decreases in
revenues. In addition, severance related restructuring costs in EMEA decreased from $0.7 million
for the three months ended March 31, 2010 to $41 thousand for the three months ended March 31,
2011. The operating costs in Asia-Pacific remained relatively flat.
Operating costs as a percentage of revenue were 69.0% and 68.7% for the three months ended March
31, 2011 and 2010, respectively. The percentage of operating costs to revenues for the three months
ended March 31, 2011 was relatively consistent with the same period in prior year.
Depreciation and Amortization
For the three months ended March 31, 2011, depreciation and amortization expense increased $0.3
million, or 21.0%, when compared to the same period in the prior year. Changes related to foreign
currency exchange rates were insignificant for the three months ended March 31, 2011. Depreciation
and amortization expense increased due to capital expenditures of approximately $5.7 million placed
in service over the twelve-month period ended March 31, 2011.
Depreciation and amortization expense as a percentage of revenue were 2.6% and 2.3% for the three
months ended March 31, 2011 and 2010, respectively.
Selling, General and Administrative
For the three months ended March 31, 2011, selling, general and administrative expenses decreased
$1.9 million, or 10.1%, to $16.9 million compared to $18.8 million for the three months ended March
31, 2010. Changes related to foreign currency exchange rates unfavorably impacted costs by $0.3
million, of which $0.1 million and $0.2 million were related to unfavorable impacts in EMEA and
Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, selling, general
and administrative expenses decreased $2.2 million, or 11.7%, for the three months ended March 31,
2011, compared to the same period in the prior year. This $2.2 million decrease in selling, general
and administrative expenses consisted of $1.2 million, $0.9 million and $0.1 million in decreases
in the Americas, EMEA and Asia-Pacific, respectively. The decrease in selling, general and
administrative expenses in the Americas was related to reductions in salary and related costs and
reductions in professional fees of approximately 6% when compared to the same period in the prior
year. In addition, no restructuring costs were incurred in the Americas in the three months ended
March 31, 2011 compared to $0.2 million incurred in the same period in the prior year. Decreases in
selling, general and administrative expenses in EMEA were primarily a result of reductions in
restructuring costs from $1.0 million for the three months ended March 31, 2010 to $47 thousand for
the three months ended March 31, 2011. In addition, there were decreases in EMEAs salary and
related costs of approximately 2%, when compared to the same period in the prior year. Decreases in
selling, general and administrative expenses in Asia-Pacific were also related to reduction in
salary and related costs.
As a result of the above factors, selling, general and administrative expenses as a percentage of
revenues decreased to 23.1% for the three months ending March 31, 2011 compared to 28.2% for the
three months ended March 31, 2010.
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Other Income
Interest Income and Other Income (Expense), Net
For the three months ended March 31, 2011, interest income and other income (expense) decreased
$0.2 million when compared to the same period in the prior year. Interest income and other income
(expense) primarily relates to foreign currency exchange gains and losses.
Interest Expense
For the three months ended March 31, 2011, consolidated interest expense was consistent with the
three months ended March 31, 2010 as average debt and interest rates were comparable for each of
the periods then ended.
Income Taxes
The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in
accordance with the provisions of Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 740, Income Taxes. As a result, substantially all domestic federal
income taxes, as well as certain state and foreign income taxes, recorded for the three months
ended March 31, 2011 and 2010 were fully reserved with changes 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).
The income tax expense recorded for the three months ended March 31, 2010 consisted primarily of
income taxes due in foreign and state jurisdictions in which the Company operates.
Income tax expense differs from the expected tax at statutory rates due primarily to the change in
valuation allowance for 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. In concluding that a full valuation allowance on domestic
federal and certain state and foreign income taxes was required, the Company primarily considered
factors such as the history of operating losses and the nature of the deferred tax assets. Interim
period income tax expense or benefit is computed at the estimated annual effective tax rate, unless
adjusted for specific discrete items as required.
Income tax benefit as a percentage of income before income taxes was approximately 8.6% for the
three months ended March 31, 2011 as compared to income tax expense as a percentage of income
before income taxes of approximately 30.4% for the three months ended March 31, 2010. 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 change in the income tax rates between periods is
related to a lower level of pre-tax income in 2010 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 Companys 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 was $25 thousand for the three months ended March 31, 2011
compared to net cash used in operating activities of $1.9 million for the three months ended March
31, 2010. The decrease in net cash used in operating activities was primarily due to a $3.6 million
increase in net income for the three months ended March 31, 2011 due to higher revenues and lower
restructuring costs as compared to the same period in prior year. The cash impact increase in net
income was partially offset by non-cash items, including a $1.2 million deferred tax benefit
recorded in connection with the SLM acquisition, and differences in changes in working capital
requirements, which decreased cash flows by $5.2 million for the three months ended March 31, 2011
compared to a decrease of approximately $4.5 million in the three months ended March 31, 2010.
Net cash used in investing activities increased to $4.6 million for the three months ended March
31, 2011 from $2.4 million for the three months ended March 31, 2010 primarily due to $3.9 million
of cash paid, net of cash acquired of $1.1 million, in connection with the SLM acquisition. This
increase in cash used relating to the SLM acquisition is partially offset by a reduction in capital
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expenditures from $2.4 million for the three months ended March 31, 2010 to $0.8 million for the
three months ended March 31, 2011. The decrease in capital expenditures compared to the prior year
is due to the timing of capital projects in the current year.
Consolidated capital expenditures for the calendar year 2011 have been budgeted at $11.0 million to
$12.0 million. Such expenditures, however, will depend on many factors beyond the Companys
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 2011 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 for the three months ended March 31, 2011 was consistent with
the three months ended March 31, 2010. Financing activities during the current and prior year
periods consisted of principal payments on long-term capital leases.
While the Companys operating results for the three months ended March 31, 2011 have improved as
compared to the same period in the prior year, the worldwide economy, including the 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 Companys 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 August 4, 2009, Furmanite Worldwide, Inc. (FWI), a wholly owned subsidiary of the Parent
Company, and certain foreign subsidiaries of FWI (the designated borrowers) entered into a credit
agreement dated July 31, 2009 with a banking syndicate comprising Bank of America, N.A. and Compass
Bank (the Credit Agreement). The Credit Agreement, which matures on January 31, 2013, provides a
revolving credit facility of up to $50.0 million. A portion of the amount available under the
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 Credit Agreement (not in excess of
$5.0 million in the aggregate) is available for swing line loans to FWI. The loans outstanding
under the Credit Agreement may not exceed $35.0 million in the aggregate to the designated
borrowers.
At each of March 31, 2011 and December 31, 2010, $30.0 million was outstanding under the Credit
Agreement. Borrowings under the 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 EBITDA
ratio (as defined in the Credit Agreement)) which was 2.3% at each of March 31, 2011 and December
31, 2010. The Credit Agreement contains a commitment fee which ranges between 0.25% to 0.30% based
on the funded debt to EBITDA ratio, and was 0.25% at each of March 31, 2011 and December 31, 2010,
based on the unused portion of the amount available under the Credit Agreement. All obligations
under the 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 certain of FWI and its
subsidiaries assets (which approximates $144.1 million of current assets and property and
equipment as of March 31, 2011) and is without recourse to the Parent Company. FWI is subject to
certain compliance provisions including, but not limited to, maintaining certain funded debt and
fixed charge coverage ratios, tangible asset concentration levels, and capital expenditure
limitations as well as restrictions on indebtedness, guarantees, dividends and other contingent
obligations and transactions. Events of default under the Credit Agreement include customary
events, such as change of control, breach of covenants or breach of representations and warranties.
At March 31, 2011, FWI was in compliance with all covenants under the Credit Agreement.
Considering the outstanding borrowings of $30.0 million, and $1.0 million related to outstanding
letters of credit, the unused borrowing capacity under the Credit Agreement was $19.0 million at
March 31, 2011, with a limit of $5.0 million of this capacity remaining for the designated
borrowers.
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 $9.2 million, net of cash acquired of
$1.1 million. 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 relates to the 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
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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 $5.3 million ($2.9 million denominated in U.S. dollar and $2.4 million denominated in Australian dollar) payable in two annual
installments, which mature February 23, 2013. All obligations
under the Notes are secured by a first priority lien on the assets
acquired in the acquisition. At March 31, 2011, $5.4 million was outstanding
under the Notes. The Notes bear interest at a fixed rate of 2.5% per annum.
At the end of 2009 and in the first half of 2010, the Company committed to cost reduction
initiatives in order to more strategically align the Companys operating, selling, general and
administrative costs relative to revenues. As of March 31, 2011, the costs incurred since the
inception of these cost reduction initiatives totaled approximately $6.9 million. During the three
months ended March 31, 2011, the Company incurred restructuring charges of $0.1 million related to
the 2010 initiative and made cash payments of $0.7 million related to both the 2009 and 2010
initiatives. As of March 31, 2011, the remaining reserve associated with these
initiatives totaled $1.0 million with estimated additional charges to be incurred of approximately
$0.5 million, all of which are expected to require cash payments. Total workforce reductions, which
began in the fourth quarter of 2009, included terminations for 165 employees, which included
reductions of 31 employees in the Americas, 133 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 Credit Agreement, will be sufficient to finance current operations,
including the Companys cost reduction initiative obligations, planned capital expenditure
requirements and internal growth for the foreseeable future.
Critical Accounting Policies and Estimates
The preparation of the Companys 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. Managements Discussion and Analysis of Financial Condition and
Results of Operations in the Companys Annual Report on Form 10-K for the year ended December 31,
2010.
Critical accounting policies are those that are most important to the portrayal of the Companys
financial position and results of operations. These policies require managements most difficult,
subjective or complex judgments, often employing the use of estimates about the effect of matters
that are inherently uncertain. The Companys critical accounting policies and estimates, for which
no significant changes have occurred in the three months ended March 31, 2011, 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 Companys 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 based primarily on time and materials. Substantially all projects are generally short
term in nature. Revenues are recognized when persuasive evidence of an arrangement exists, services
to customers have been rendered or when products have been delivered and risk of ownership has
passed to the customer, the selling price is fixed or determinable and collectability is reasonably
assured. Revenues are recorded, net of sales tax. The Company provides limited warranties to
customers, depending upon the service performed.
Allowance for Doubtful Accounts
Credit is extended to customers based on evaluation of the customers 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.
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Goodwill, Intangible and Long-Lived 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. At March 31,
2011 and December 31, 2010, the Company had no significant intangible assets subject to
amortization under FASB ASC 350. 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 one reporting unit for the purpose of testing goodwill impairment. Second, if an
impairment is indicated, the implied fair value of the reporting units goodwill is determined by
allocating the units 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 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. On December 31, 2010, Furmanites fair
value substantially exceeded its carrying value.
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 Companys 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.
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
Companys 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 Companys 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. To the extent that it is determined
the deferred tax assets will not be recovered, a valuation allowance must be established for such
assets. In making such a determination, the Company must take into account positive and negative
evidence including projections of future taxable income and assessments of potential tax planning
strategies.
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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 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
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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 January 2010, the FASB issued Accounting Standards Update 2010-06, Improving Disclosures about
Fair Value Measurements (ASU 2010-06). ASU 2010-06 provides more robust disclosures about the
transfers between Levels 1 and 2, the activity in Level 3 fair value measurements and clarifies the
level of disaggregation and disclosure related to the valuation techniques and inputs used. The new
disclosures are effective for interim and annual reporting periods beginning after December 15,
2009, except for the Level 3 activity disclosures, which are effective for fiscal years beginning
after December 15, 2010. There was not a material impact from the adoption of this guidance on the
Companys consolidated financial statements.
Off-Balance Sheet Transactions
The Company was not a party to any off-balance sheet transactions at March 31, 2011 or December 31,
2010, or for the three months ended March 31, 2011.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys 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 Companys 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, 2011, 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 Companys 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. Overall volatility in
currency exchange rates has increased over the past several years. Currencies in the first quarter
of 2011 were not as volatile as in recent periods, as foreign currencies exchange rate changes,
primarily the Euro, the Australian Dollar and the British Pound, relative to the U.S. dollar
resulted in a favorable impact on the Companys U.S. dollar reported revenues for the three months
ended March 31, 2011 when compared to the three months ended March 31, 2010. The revenue impact was
somewhat mitigated with similar exchange effects on operating costs thereby reducing the exchange
rate effect on operating income. The Company does not use interest rate or foreign currency rate
hedges.
Based on the three months ended March 31, 2011, foreign currency-based revenues and operating
income of $35.3 million and $2.1 million, respectively, a ten percent depreciation in all
applicable foreign currencies would result in a decrease in revenues and operating income of $3.2
million and $0.2 million, respectively.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Companys principal executive officer and principal financial officer have evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)) as of March 31, 2011. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that the Companys
disclosure controls and procedures are effective 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 Commissions rules and forms and is accumulated and communicated to the
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Companys management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Companys internal control over financial reporting during the
quarter ended March 31, 2011, the most recently completed fiscal quarter, that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
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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
United States 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 United States in the amount of $1.1
million and $1.2 million at March 31, 2011 and December 31, 2010, respectively.
Furmanite America, Inc., a subsidiary of the Company, is involved in disputes with two customers,
who are each negotiating with a governmental regulatory agency and claim that the subsidiary failed
to provide them with satisfactory services at the customers facilities. On April 17, 2009, a
customer, INEOS USA LLC, 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 customers facilities, breached its contract with the customer and
failed to provide the customer with adequate and timely information to support the subsidiarys
work at the customers facility from 1998 through the second quarter of 2005. The customers
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 customers facility, and also seeks unspecified
punitive damages. The subsidiary believes that it provided the customer with adequate and timely
information to support the subsidiarys work at the customers facilities and will vigorously
defend against the customers claim.
In the first quarter of 2008, a subsidiary of the Company filed an action seeking to vacate a $1.35
million arbitration award related to a sales brokerage agreement associated with a business that
the subsidiary sold in 2005. The subsidiary believed that the sales broker was an affiliate of
another company that in 2006 settled all of its claims, as well as all of the claims of its
affiliates, against the subsidiary. The action to vacate the arbitration award terminated and, in
January 2010, the subsidiary paid the full amount of the arbitration award plus accrued interest to
the sales broker which was accrued as of December 31, 2009. In separate actions, the subsidiary was
seeking to enforce the prior settlement agreement executed by the sales brokers affiliate and
obtain an equitable offset of the arbitration award, however, upon mutual agreement by all parties,
these separate actions were dismissed by the court in July 2010.
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 $1.9
million were recorded in accrued expenses and other current liabilities as of March 31, 2011 and
December 31, 2010.
Item 1A. Risk Factors
During the quarter ended March 31, 2011, there were no material changes to the risk factors
reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
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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 Registrants 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 Registrants 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 Registrants 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 Registrants
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 Registrants 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 Registrants
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 Registrants 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 Registrants 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
Registrants Series B Junior Participating Preferred Stock, filed as
Exhibit 4.2 to the Registrants 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 Registrants 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 Registrants
Form 8-A/A filed on April 18, 2008). |
|||
31.1* | Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011. |
|||
31.2* | Certification of Principal Financial Officer, Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011. |
|||
32.1* | Certification of Chief Executive Officer, Pursuant to Section 906(a)
of the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011. |
|||
32.2* | Certification of Principal Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011. |
* | Filed herewith. |
31
Table of Contents
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) |
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Date: May 9, 2011
32