Attached files
file | filename |
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EX-32.1 - EX-32.1 - FURMANITE CORP | d75055exv32w1.htm |
EX-31.2 - EX-31.2 - FURMANITE CORP | d75055exv31w2.htm |
EX-31.1 - EX-31.1 - FURMANITE CORP | d75055exv31w1.htm |
EX-32.2 - EX-32.2 - FURMANITE CORP | d75055exv32w2.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 June 30, 2010
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 | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
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 40,752,815 shares of the registrants common stock outstanding as of August 2, 2010.
FURMANITE CORPORATION AND SUBSIDIARIES
INDEX
INDEX
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Table of Contents
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.
3
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 31,837 | $ | 36,117 | ||||
Accounts receivable, trade (net of allowance for doubtful accounts of $1,394 and $1,617
as of June 30, 2010 and December 31, 2009, respectively) |
57,936 | 52,021 | ||||||
Receivable from businesses distributed to common stockholders |
1,443 | 1,443 | ||||||
Inventories: |
||||||||
Raw materials and supplies |
17,103 | 18,226 | ||||||
Work-in-process |
7,563 | 8,231 | ||||||
Finished goods |
154 | 370 | ||||||
Prepaid expenses and other current assets |
5,174 | 7,642 | ||||||
Total current assets |
121,210 | 124,050 | ||||||
Property and equipment |
66,976 | 66,909 | ||||||
Less: accumulated depreciation and amortization |
(37,503 | ) | (36,741 | ) | ||||
Property and equipment, net |
29,473 | 30,168 | ||||||
Goodwill |
13,148 | 13,148 | ||||||
Deferred tax assets |
4,341 | 3,707 | ||||||
Intangible and other assets |
3,656 | 3,916 | ||||||
Total assets |
$ | 171,828 | $ | 174,989 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 139 | $ | 174 | ||||
Accounts payable |
16,722 | 17,077 | ||||||
Accrued expenses and other current liabilities |
22,135 | 25,599 | ||||||
Income taxes payable |
1,140 | 1,589 | ||||||
Total current liabilities |
40,136 | 44,439 | ||||||
Long-term debt, non-current |
30,076 | 30,139 | ||||||
Net pension liability |
11,500 | 12,358 | ||||||
Other liabilities |
2,760 | 2,723 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Stockholders equity: |
||||||||
Series B Preferred Stock, unlimited shares authorized, none outstanding |
| | ||||||
Common stock, no par value; 60,000,000 shares authorized; 40,742,815 and 40,682,815 shares
issued as of June 30, 2010 and December 31, 2009, respectively |
4,723 | 4,723 | ||||||
Additional paid-in capital |
132,600 | 132,106 | ||||||
Accumulated deficit |
(17,908 | ) | (21,859 | ) | ||||
Accumulated other comprehensive loss |
(14,046 | ) | (11,627 | ) | ||||
Treasury stock, at cost (4,008,963 shares as of June 30, 2010 and December 31, 2009) |
(18,013 | ) | (18,013 | ) | ||||
Total stockholders equity |
87,356 | 85,330 | ||||||
Total liabilities and stockholders equity |
$ | 171,828 | $ | 174,989 | ||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share data)
(Unaudited)
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
$ | 77,513 | $ | 69,726 | $ | 143,948 | $ | 132,758 | ||||||||
Costs and expenses: |
||||||||||||||||
Operating costs (exclusive of depreciation and amortization) |
51,922 | 47,261 | 97,584 | 89,839 | ||||||||||||
Depreciation and amortization expense |
1,572 | 1,447 | 3,121 | 2,790 | ||||||||||||
Selling, general and administrative expense |
18,493 | 20,212 | 37,256 | 37,683 | ||||||||||||
Total costs and expenses |
71,987 | 68,920 | 137,961 | 130,312 | ||||||||||||
Operating income |
5,526 | 806 | 5,987 | 2,446 | ||||||||||||
Interest income and other income (expense), net |
(246 | ) | 313 | 96 | 219 | |||||||||||
Interest expense |
(241 | ) | (299 | ) | (482 | ) | (592 | ) | ||||||||
Income before income taxes |
5,039 | 820 | 5,601 | 2,073 | ||||||||||||
Income tax expense |
(1,479 | ) | (589 | ) | (1,650 | ) | (962 | ) | ||||||||
Net income |
$ | 3,560 | $ | 231 | $ | 3,951 | $ | 1,111 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.10 | $ | 0.01 | $ | 0.11 | $ | 0.03 | ||||||||
Diluted |
$ | 0.10 | $ | 0.01 | $ | 0.11 | $ | 0.03 | ||||||||
Weighted-average number of common and common equivalent shares used
in computing net income per common share: |
||||||||||||||||
Basic |
36,734 | 36,615 | 36,711 | 36,609 | ||||||||||||
Diluted |
36,932 | 36,795 | 36,871 | 36,763 |
The accompanying notes are an integral part of these financial statements.
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Table of Contents
FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Six Months Ended June 30, 2010 (Unaudited) and Year Ended December 31, 2009
(in thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Common Shares | Common | Paid-In | Accumulated | Comprehensive | Treasury | |||||||||||||||||||||||||||
Issued | Treasury | Stock | Capital | Deficit | Income (Loss) | Stock | Total | |||||||||||||||||||||||||
Balances at January 1, 2009 |
40,612,815 | 4,008,963 | $ | 4,715 | $ | 131,418 | $ | (19,029 | ) | $ | (7,774 | ) | $ | (18,013 | ) | $ | 91,317 | |||||||||||||||
Net loss |
| | | | (2,830 | ) | | | (2,830 | ) | ||||||||||||||||||||||
Stock-based compensation and stock
option exercises |
70,000 | | 8 | 688 | | | | 696 | ||||||||||||||||||||||||
Change in pension net actuarial loss and
prior service credit, net of tax |
| | | | | (8,918 | ) | | (8,918 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | | 5,065 | | 5,065 | ||||||||||||||||||||||||
Balances at December 31, 2009 |
40,682,815 | 4,008,963 | $ | 4,723 | $ | 132,106 | $ | (21,859 | ) | $ | (11,627 | ) | $ | (18,013 | ) | $ | 85,330 | |||||||||||||||
Net income |
| | | | 3,951 | | | 3,951 | ||||||||||||||||||||||||
Stock-based compensation and stock
option exercises |
60,000 | | | 494 | | | | 494 | ||||||||||||||||||||||||
Change in pension net actuarial loss and
prior service credit, net of tax |
| | | | | 1,137 | | 1,137 | ||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | | (3,556 | ) | | (3,556 | ) | ||||||||||||||||||||||
Balances at June 30, 2010 |
40,742,815 | 4,008,963 | $ | 4,723 | $ | 132,600 | $ | (17,908 | ) | $ | (14,046 | ) | $ | (18,013 | ) | $ | 87,356 | |||||||||||||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Six Months | ||||||||
Ended June 30, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 3,951 | $ | 1,111 | ||||
Reconciliation of net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
3,121 | 2,790 | ||||||
Provision for doubtful accounts |
327 | 205 | ||||||
Deferred income taxes |
(86 | ) | (145 | ) | ||||
Stock-based compensation expense |
494 | 281 | ||||||
Other, net |
441 | (643 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(6,850 | ) | 5,506 | |||||
Inventories |
1,842 | (1,756 | ) | |||||
Prepaid expenses and other current assets |
1,316 | (243 | ) | |||||
Accounts payable |
(496 | ) | (2,817 | ) | ||||
Accrued expenses and other current liabilities |
(3,142 | ) | (2,023 | ) | ||||
Income taxes payable |
(352 | ) | 2,901 | |||||
Other, net |
(47 | ) | (596 | ) | ||||
Net cash provided by operating activities |
519 | 4,571 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(3,451 | ) | (3,018 | ) | ||||
Acquisition of assets |
(350 | ) | (500 | ) | ||||
Proceeds from sale of assets |
195 | 162 | ||||||
Net cash used in investing activities |
(3,606 | ) | (3,356 | ) | ||||
Financing activities: |
||||||||
Payments on debt |
(99 | ) | (224 | ) | ||||
Net cash used in financing activities |
(99 | ) | (224 | ) | ||||
Effect of exchange rate changes on cash |
(1,094 | ) | (200 | ) | ||||
(Decrease) increase in cash and cash equivalents |
(4,280 | ) | 791 | |||||
Cash and cash equivalents at beginning of period |
36,117 | 30,793 | ||||||
Cash and cash equivalents at end of period |
$ | 31,837 | $ | 31,584 | ||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ | 400 | $ | 606 | ||||
Cash paid (received) for income taxes, net of refunds received |
$ | 1,577 | $ | (726 | ) |
The accompanying notes are an integral part of these financial statements.
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Table of Contents
FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
(Unaudited)
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 3,560 | $ | 231 | $ | 3,951 | $ | 1,111 | ||||||||
Other comprehensive income: |
||||||||||||||||
Change in pension net actuarial loss
and prior service credit, net of tax |
205 | (579 | ) | 1,137 | (530 | ) | ||||||||||
Foreign currency translation adjustments |
(1,356 | ) | 4,720 | (3,556 | ) | 3,699 | ||||||||||
Total other comprehensive income (loss) |
(1,151 | ) | 4,141 | (2,419 | ) | 3,169 | ||||||||||
Comprehensive income |
$ | 2,409 | $ | 4,372 | $ | 1,532 | $ | 4,280 | ||||||||
The accompanying notes are an integral part of these financial statements.
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FURMANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
June 30, 2010
(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). 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, 2009 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.
On November 27, 2000, the Board of Directors of the Company authorized the distribution of its
pipeline, terminaling and product marketing business (the Distribution) to its stockholders in
the form of a new limited liability company, Kaneb Services LLC (KSL). On June 29, 2001, the
Distribution was completed, with each shareholder of the Company receiving one common share of KSL
for each three shares of the Companys common stock held on June 20, 2001, the record date for the
Distribution, resulting in the distribution of 10,850,000 KSL common shares. Pursuant to the
Distribution, the Company entered into an agreement (the Distribution Agreement) with KSL,
whereby KSL is obligated to pay the Company amounts equal to certain expenses and tax liabilities
incurred by the Company in connection with the Distribution. The Distribution Agreement also
requires KSL to pay the Company an amount calculated based on any income tax liability of the
Company that, in the sole judgment of the Company, (i) is attributable to increases in income tax
from past years arising out of adjustments required by federal and state tax authorities, to the
extent that such increases are properly allocable to the businesses that became part of KSL, or
(ii) is attributable to the distribution of KSLs common shares and the operations of KSLs
businesses prior to the Distribution date. In the event of an examination of the Company by federal
or state tax authorities, the Company will have unfettered control over the examination,
administrative appeal, settlement or litigation that may be involved, notwithstanding that KSL has
agreed to pay any additional tax. KSL was purchased by Valero L.P. in July 2005 and KSLs
obligations under the Distribution Agreement were assumed by Valero L.P. During 2006, accrued
income taxes and the receivable from businesses distributed to common stockholders were both
reduced by $4.6 million related to the expiration of statutes for previously provided tax
exposures. The receivable from businesses distributed to common stockholders was further reduced in
2006 by $0.5 million by adjusting retained earnings for KSL previously provided tax exposures. At
each of June 30, 2010 and December 31, 2009, $1.4 million was recorded as receivable from
businesses distributed to common stockholders pursuant to the provisions of the Distribution
Agreement.
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 and
six months ended June 30, 2010 and 2009.
Revenues under long-term service contracts, generally greater than six months, are accounted for
using a proportional performance method or on a straight-line basis. The Company recognizes
revenues on a proportional basis when a contract consists of milestones or activities that are
process-related and has no other material deliverables. The Company recognizes revenues on a
straight-line basis when billing terms and performance of the contract are substantially equivalent
throughout the life of the contract.
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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. 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.
In February 2010, the FASB issued Accounting Standards Update 2010-09, Amendments to Certain
Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 amends the guidance issued in
ASC 855, Subsequent Events, by not requiring SEC filers to disclose the date through which an
entity has evaluated subsequent events. ASU 2010-09 was effective upon issuance. There was not a
material impact from the adoption of this guidance on the Companys consolidated financial
statements.
2. 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.
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 | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 3,560 | $ | 231 | $ | 3,951 | $ | 1,111 | ||||||||
Basic weighted-average common shares outstanding |
36,734 | 36,615 | 36,711 | 36,609 | ||||||||||||
Dilutive effect of common stock equivalents |
198 | 180 | 160 | 154 | ||||||||||||
Diluted weighted-average common shares outstanding |
36,932 | 36,795 | 36,871 | 36,763 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.10 | $ | 0.01 | $ | 0.11 | $ | 0.03 | ||||||||
Dilutive |
$ | 0.10 | $ | 0.01 | $ | 0.11 | $ | 0.03 | ||||||||
Stock options excluded from diluted weighted-average common shares
outstanding because their inclusion would have an anti-dilutive effect: |
515 | 672 | 560 | 592 |
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3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Compensation and benefits1 |
$ | 12,858 | $ | 11,085 | ||||
Estimated potential uninsured liability claims |
1,886 | 3,405 | ||||||
Taxes other than income |
1,601 | 1,393 | ||||||
Value added tax payable |
1,562 | 1,612 | ||||||
Professional, audit and legal fees |
1,050 | 948 | ||||||
Customer deposit |
936 | 2,731 | ||||||
Other employee related expenses |
598 | 634 | ||||||
Rent |
559 | 600 | ||||||
Interest |
33 | 42 | ||||||
Payments due on purchased assets |
| 350 | ||||||
Other2 |
1,052 | 2,799 | ||||||
$ | 22,135 | $ | 25,599 | |||||
1 | Includes restructuring accruals of $0.6 million and $0.7 million as of June 30, 2010 and December 31, 2009, respectively, and $0.3 million of retirement related costs as of June 30, 2010. | |
2 | Includes restructuring accruals of $0.2 million as of June 30, 2010. |
4. Indebtedness
Long-term debt consists of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Borrowings under the revolving credit facility |
$ | 30,000 | $ | 30,000 | ||||
Capital leases |
215 | 313 | ||||||
Total long-term debt |
30,215 | 30,313 | ||||||
Less: current portion of long-term debt |
(139 | ) | (174 | ) | ||||
Total long-term debt, non-current |
$ | 30,076 | $ | 30,139 | ||||
On August 4, 2009, Furmanite Worldwide, Inc. and subsidiaries (FWI), a wholly owned subsidiary of
the Parent Company, and certain foreign subsidiaries (the designated borrowers) of FWI entered
into a new credit agreement dated July 31, 2009 with Bank of America, N.A. (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.
The proceeds from the initial borrowing on the credit agreement were $35.0 million and were used to
pay the amounts outstanding under the previous loan agreement, which was scheduled to mature in
January 2010, at which time the previous loan agreement was terminated by the Company. Letters of
credit issued from the previous loan agreement were replaced with similar letters of credit by the
credit agreement. There were no material circumstances surrounding the termination and no material
early termination penalties were incurred by FWI.
As of June 30, 2010 and December 31, 2009, $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 were 2.6% and 2.5% at June 30, 2010 and December
31, 2009, respectively. The credit
11
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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 June 30, 2010, 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 $121.5 million of
current assets and property and equipment as of June 30, 2010) 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 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 June 30, 2010, FWI was in compliance with all covenants under the credit agreement.
Considering the outstanding borrowings of $30.0 million, and $5.5 million related to outstanding
letters of credit, the unused borrowing capacity under the credit agreement was $14.5 million at
June 30, 2010, with a limit of $5.0 million of this capacity remaining for the designated
borrowers.
5. 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 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 pension cost for the U.K. and Norwegian Plans includes the following components (in thousands):
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 198 | $ | 126 | $ | 404 | $ | 237 | ||||||||
Interest cost |
879 | 842 | 1,779 | 1,586 | ||||||||||||
Expected return on plan assets |
(862 | ) | (770 | ) | (1,745 | ) | (1,450 | ) | ||||||||
Amortization of prior service cost |
(23 | ) | (25 | ) | (46 | ) | (47 | ) | ||||||||
Amortization of net actuarial loss |
260 | 47 | 526 | 89 | ||||||||||||
Net periodic pension cost |
$ | 452 | $ | 220 | $ | 918 | $ | 415 | ||||||||
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: 6.8% overall, 8.5% for
equities and 5.1% for bonds. Estimated annual pension plan contributions are assumed to be
consistent with the current expected contribution level of $0.8 million for 2010.
6. 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 and six months ended June 30,
2010, the total compensation cost charged against income and included in selling, general and
administrative expenses for stock-based compensation arrangement was $0.1 million and $0.5 million,
respectively, and $0.1 million and $0.3 million for the three and six months ended June 30, 2009.
The expense for the six months ended June 30, 2010 includes $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 during the first quarter of 2010. Tax effects from stock-based
compensation are insignificant due to the Companys current domestic tax position. 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 June 30, 2010, the total unrecognized compensation expense related to
stock options and restricted stock awards was $0.6 million and $0.5 million, respectively.
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7. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the equity section of the consolidated balance sheets
includes the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Net actuarial loss and prior service credit |
$ | (16,325 | ) | $ | (17,902 | ) | ||
Less: deferred tax benefit |
4,551 | 4,991 | ||||||
Net of tax |
(11,774 | ) | (12,911 | ) | ||||
Foreign currency translation adjustment |
(2,272 | ) | 1,284 | |||||
Total accumulated other comprehensive loss |
$ | (14,046 | ) | $ | (11,627 | ) | ||
8. 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 and six months ended June 30, 2010 and 2009 were fully offset by a corresponding change
in valuation allowance. The income tax expense recorded for the three and six months ended June 30,
2010 and 2009 consisted primarily of income taxes due in foreign and state jurisdictions of the
Company.
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 expense as a percentage of income before income taxes was approximately 29.5% and 46.4%
for the six months ended June 30, 2010 and 2009, respectively. For the three months ended June 30,
2010 and 2009 income tax expense as a percentage of income before income taxes was approximately
29.4% and 71.8%, respectively. The changes in the rates are related to 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. The difference in mix, combined with the lower level of income
before income taxes, resulted in a significantly higher effective income tax rate in 2009.
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.
Uncertain tax positions in certain foreign jurisdictions would not impact the effective foreign tax
rate because non-current unrecognized 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. The Company incurred no significant interest or penalties for the three
and six months ended June 30, 2010 and 2009. Unrecognized tax benefits at June 30, 2010 and
December 31, 2009 of $1.1 million and $1.0 million, respectively, 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 six months ended June 30,
2010 is as follows (in thousands):
Balance at December 31, 2009 |
$ | 1,007 | ||
Additions based on tax positions |
131 | |||
Reductions due to lapses of statutes of limitations |
(31 | ) | ||
Balance at June 30, 2010 |
$ | 1,107 | ||
9. 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 $1.2
million and $1.3 million at June 30, 2010 and December 31, 2009, 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. 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 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 and $3.4 million were recorded in accrued expenses and other current liabilities as of June
30, 2010 and December 31, 2009, respectively.
10. 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 technical services segment 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 (which includes operations in North America and Latin America),
EMEA (which includes operations in Europe, the Middle East and Africa) and Asia-Pacific. For
comparative purposes, the Americas geographical area is formerly known as the United States. The
geographical area was renamed to incorporate operations in Canada and expected future expansion in
North America and Latin America. 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 June 30, 2010: |
||||||||||||||||
Under pressure services |
$ | 12,359 | $ | 8,049 | $ | 4,174 | $ | 24,582 | ||||||||
Turnaround services |
15,678 | 14,654 | 6,863 | 37,195 | ||||||||||||
Other services |
9,513 | 5,143 | 1,080 | 15,736 | ||||||||||||
Total revenues |
$ | 37,550 | $ | 27,846 | $ | 12,117 | $ | 77,513 | ||||||||
Three months ended June 30, 2009: |
||||||||||||||||
Under pressure services |
$ | 11,191 | $ | 8,416 | $ | 4,533 | $ | 24,140 | ||||||||
Turnaround services |
14,206 | 13,507 | 3,772 | 31,485 | ||||||||||||
Other services |
6,905 | 6,291 | 905 | 14,101 | ||||||||||||
Total revenues |
$ | 32,302 | $ | 28,214 | $ | 9,210 | $ | 69,726 | ||||||||
Six months ended June 30, 2010: |
||||||||||||||||
Under pressure services |
$ | 23,737 | $ | 17,604 | $ | 8,238 | $ | 49,579 | ||||||||
Turnaround services |
31,041 | 25,290 | 10,581 | 66,912 | ||||||||||||
Other services |
14,339 | 11,213 | 1,905 | 27,457 | ||||||||||||
Total revenues |
$ | 69,117 | $ | 54,107 | $ | 20,724 | $ | 143,948 | ||||||||
Six months ended June 30, 2009: |
||||||||||||||||
Under pressure services |
$ | 20,582 | $ | 18,147 | $ | 7,195 | $ | 45,924 | ||||||||
Turnaround services |
29,688 | 24,281 | 6,176 | 60,145 | ||||||||||||
Other services |
12,106 | 12,985 | 1,598 | 26,689 | ||||||||||||
Total revenues |
$ | 62,376 | $ | 55,413 | $ | 14,969 | $ | 132,758 | ||||||||
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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, 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 June 30, 2010: |
||||||||||||||||
Operating income1 |
$ | 515 | $ | 1,569 | $ | 3,442 | $ | 5,526 | ||||||||
Allocation of headquarter costs |
2,187 | (1,536 | ) | (651 | ) | | ||||||||||
Adjusted operating income |
$ | 2,702 | $ | 33 | $ | 2,791 | $ | 5,526 | ||||||||
Three months ended June 30, 2009: |
||||||||||||||||
Operating income (loss) |
$ | (2,015 | ) | $ | 883 | $ | 1,938 | $ | 806 | |||||||
Allocation of headquarter costs |
1,969 | (1,487 | ) | (482 | ) | | ||||||||||
Adjusted operating income (loss) |
$ | (46 | ) | $ | (604 | ) | $ | 1,456 | $ | 806 | ||||||
Six months ended June 30, 2010: |
||||||||||||||||
Operating income (loss)2 |
$ | (169 | ) | $ | 933 | $ | 5,223 | $ | 5,987 | |||||||
Allocation of headquarter costs |
4,317 | (3,146 | ) | (1,171 | ) | | ||||||||||
Adjusted operating income (loss) |
$ | 4,148 | $ | (2,213 | ) | $ | 4,052 | $ | 5,987 | |||||||
Six months ended June 30, 2009: |
||||||||||||||||
Operating income (loss) |
$ | (2,920 | ) | $ | 2,958 | $ | 2,408 | $ | 2,446 | |||||||
Allocation of headquarter costs |
3,337 | (2,625 | ) | (712 | ) | | ||||||||||
Adjusted operating income |
$ | 417 | $ | 333 | $ | 1,696 | $ | 2,446 | ||||||||
1 | Includes restructuring charges totaling $0.2 million and $0.7 million in the Americas and EMEA, respectively. | |
2 | Includes restructuring charges totaling $0.4 million and $2.3 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):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Americas |
$ | 17,165 | $ | 17,050 | ||||
EMEA |
10,570 | 11,248 | ||||||
Asia-Pacific |
3,356 | 3,717 | ||||||
$ | 31,091 | $ | 32,015 | |||||
11. Fair Value of Financial Instruments and Credit Risk
Fair value is defined under FASB ASC 820-10, Fair Value Measurement (ASC 820-10), as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to measure fair value under
ASC 820-10 must maximize the use of the observable inputs and minimize the use of unobservable
inputs. The standard established a fair value hierarchy based on three levels of inputs, of which
the first two are considered observable and the last unobservable.
| Level 1 Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| Level 2 Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. |
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| 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 June 30, 2010
and December 31, 2009 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 as well as the U.S. government. The Company does not believe that it has a
significant concentration of credit risk at June 30, 2010, as the Companys accounts receivable are
generated from these business industries with customers located throughout the Americas, EMEA and
Asia-Pacific.
12. 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 consolidation 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 has completed a substantial portion of this cost reduction initiative, which began in
the fourth quarter of 2009, however, certain lease termination costs related to this initiative,
are expected to be recognized over the next several quarters. For the three months ended June 30,
2010, restructuring costs of $0.3 million were incurred and are included in selling, general and
administrative expenses. For the six months ended June 30, 2010, restructuring costs of $0.7
million and $1.4 million were incurred and 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 $3.4 million. As of June 30, 2010, the costs
incurred since inception of this cost reduction initiative totaled approximately $3.2 million, with
approximately $0.2 million remaining related to lease termination costs expected to be incurred
during the remainder of 2010 and into 2011.
2010 Cost Reduction Initiative
In 2010, the Company continued to review its business for operating efficiencies. As a result of
this review, additional selling, general and administrative cost reduction opportunities were
identified, which resulted in further restructuring costs. These additional cost reduction
opportunities relate primarily to improving the operational and administrative efficiency of the
Companys EMEA operations, while providing a structure which will allow for future expansion of
operations within the region. For the three and six months ended June 30, 2010, restructuring
costs, related to the 2010 cost reduction initiative, of $0.6 million were incurred and are
included in selling, general and administrative expenses. Although all costs associated with this
restructuring initiative have not yet been determined, the Company expects to incur total costs of
approximately $4.0 million in connection with this cost reduction initiative.
In connection with these initiatives, the Company has 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.
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The activity related to reserves associated with the cost reduction initiatives for the six months
ended June 30, 2010, is as follows (in thousands):
Reserve at | Reserve at | |||||||||||||||||||
December 31, | Foreign currency | June 30, | ||||||||||||||||||
2009 | Charges | Cash payments | adjustments | 2010 | ||||||||||||||||
2009 Initiative |
||||||||||||||||||||
Severance and benefit costs |
$ | 690 | $ | 1,286 | $ | (1,633 | ) | $ | (61 | ) | $ | 282 | ||||||||
Lease termination costs |
| 405 | (290 | ) | (1 | ) | 114 | |||||||||||||
Other restructuring costs |
| 441 | (416 | ) | | 25 | ||||||||||||||
2010 Initiative |
||||||||||||||||||||
Severance and benefit costs |
| 592 | (264 | ) | 17 | 345 | ||||||||||||||
$ | 690 | $ | 2,724 | $ | (2,603 | ) | $ | (45 | ) | $ | 766 | |||||||||
Restructuring costs associated with the cost reduction initiatives consist of the following (in
thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Severance and benefit costs |
$ | 692 | $ | | $ | 1,878 | $ | | ||||||||
Lease
termination costs |
89 | | 405 | | ||||||||||||
Other restructuring costs |
89 | | 441 | | ||||||||||||
$ | 870 | $ | | $ | 2,724 | $ | | |||||||||
Restructuring costs were incurred in the following geographical areas (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Americas |
$ | 180 | $ | | $ | 367 | $ | | ||||||||
EMEA |
690 | | 2,357 | | ||||||||||||
$ | 870 | $ | | $ | 2,724 | $ | | |||||||||
Total workforce reductions related to the cost reduction initiatives included terminations for 117
employees, which include reductions of 27 employees in the Americas, 89 employees in EMEA, and one
employee in Asia-Pacific.
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Table of Contents
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) provides specialized technical services, including under pressure services which include
leak sealing, hot tapping, line stopping, line isolation, composite repair and valve testing;
turnaround services which include on-site machining, heat treatment, bolting, valve repair; and
other services which includes heat exchanger design and repair, concrete repair and valve and other
product manufacturing. These products and services are provided primarily to electric power
generating plants, petroleum refineries and other process industries in Europe, the Middle East,
Africa (collectively EMEA), North America and Latin America (collectively Americas), and
Asia-Pacific through Furmanite Worldwide, Inc. and its domestic and international subsidiaries and
affiliates (collectively, Furmanite).
Financial Overview
For the three and six months ended June 30, 2010, consolidated revenues increased by $7.8 million
and $11.2 million, respectively, compared to the three and six months ended June 30, 2009,
primarily related to increases in leak sealing, hot tapping, line stopping and bolting services.
The Companys net income for the three and six months ended June 30, 2010 increased by $3.3 million
and $2.8 million, respectively, compared to the three and six months ended June 30, 2009. The
increase in net income was a result of the increase in revenues as well as operational improvements
realized as a result of the cost reduction initiatives which began in late 2009 and have continued
through the first half of 2010.
In December 2009, the Company committed to a cost reduction initiative, including planned workforce
reductions and consolidation of certain functions, in order to more strategically align the
Companys operating, selling, general and administrative costs relative to revenues. The Company
expects to incur total costs of approximately $3.4 million in connection with this cost reduction
initiative. As of June 30, 2010, the Company has completed a substantial portion of the 2009 cost
reduction initiative with total restructuring costs incurred since its inception of approximately
$3.2 million, of which $0.3 million and $2.1 million were incurred in the three and six months
ended June 30, 2010, respectively. Additional lease termination costs of $0.2 million related to
this initiative are expected to be incurred throughout the remainder of 2010 and into 2011.
In May 2010, the Company committed to an additional cost reduction initiative, primarily related to
the consolidation of certain functions within the Companys EMEA
operations. The Company has taken and continues to take
specific actions in order to improve the operational and administrative efficiency of its EMEA
operations, while providing a structure which will allow for future expansion of operations within
the region. Although all costs associated with this restructuring initiative have not yet been
determined, the Company expects to incur total costs of approximately $4.0 million in connection
with this cost reduction initiative, which are expected to be primarily related to severance and
benefit costs. For the three and six months ended June 30, 2010, restructuring costs of $0.6
million were incurred as a result of this additional cost reduction initiative. The Company expects
to complete the 2010 cost reduction initiative in 2011, with the majority of these costs expected
in the second half of 2010. Upon completion of the 2010 cost
reduction initiative, the Company estimates the effects of the
initiative to result in annual cost reductions of approximately $5.0
million, primarily compensation costs, half of which will affect
operating costs with the other half impacting selling, general and
administrative costs.
As a result of these two initiatives, total restructuring costs negatively impacted operating
income by $0.9 million and $2.7 million and net income by $0.8 million and $2.4 million, for the
three and six months ended June 30, 2010, respectively.
The Companys diluted earnings per share for the three and six months ended June 30, 2010 were
$0.10 and $0.11, respectively, compared to $0.01 and $0.03 for the three and six months ended June
30, 2009, respectively.
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Table of Contents
Results of Operations
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Revenues |
$ | 77,513 | $ | 69,726 | $ | 143,948 | $ | 132,758 | ||||||||
Costs and expenses: |
||||||||||||||||
Operating costs (exclusive of depreciation and amortization) |
51,922 | 47,261 | 97,584 | 89,839 | ||||||||||||
Depreciation and amortization expense |
1,572 | 1,447 | 3,121 | 2,790 | ||||||||||||
Selling, general and administrative expense |
18,493 | 20,212 | 37,256 | 37,683 | ||||||||||||
Total costs and expenses |
71,987 | 68,920 | 137,961 | 130,312 | ||||||||||||
Operating income |
5,526 | 806 | 5,987 | 2,446 | ||||||||||||
Interest income and other income (expense), net |
(246 | ) | 313 | 96 | 219 | |||||||||||
Interest expense |
(241 | ) | (299 | ) | (482 | ) | (592 | ) | ||||||||
Income before income taxes |
5,039 | 820 | 5,601 | 2,073 | ||||||||||||
Income tax expense |
(1,479 | ) | (589 | ) | (1,650 | ) | (962 | ) | ||||||||
Net income |
$ | 3,560 | $ | 231 | $ | 3,951 | $ | 1,111 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.10 | $ | 0.01 | $ | 0.11 | $ | 0.03 | ||||||||
Diluted |
$ | 0.10 | $ | 0.01 | $ | 0.11 | $ | 0.03 |
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Geographical Information
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Americas |
$ | 37,550 | $ | 32,302 | $ | 69,117 | $ | 62,376 | ||||||||
EMEA |
27,846 | 28,214 | 54,107 | 55,413 | ||||||||||||
Asia-Pacific |
12,117 | 9,210 | 20,724 | 14,969 | ||||||||||||
Total revenues |
77,513 | 69,726 | 143,948 | 132,758 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Operating costs (exclusive of depreciation and amortization) |
||||||||||||||||
Americas |
25,260 | 21,745 | 46,024 | 41,981 | ||||||||||||
EMEA |
19,805 | 20,267 | 39,732 | 38,890 | ||||||||||||
Asia-Pacific |
6,857 | 5,249 | 11,828 | 8,968 | ||||||||||||
Total operating costs (exclusive of depreciation and amortization) |
51,922 | 47,261 | 97,584 | 89,839 | ||||||||||||
Operating costs as a percentage of revenue |
67.0 | % | 67.8 | % | 67.8 | % | 67.7 | % | ||||||||
Depreciation and amortization expense |
||||||||||||||||
Americas, including corporate |
846 | 812 | 1,658 | 1,602 | ||||||||||||
EMEA |
453 | 394 | 920 | 745 | ||||||||||||
Asia-Pacific |
273 | 241 | 543 | 443 | ||||||||||||
Total depreciation and amortization expense |
1,572 | 1,447 | 3,121 | 2,790 | ||||||||||||
Depreciation and amortization expense as a percentage of revenue |
2.0 | % | 2.1 | % | 2.2 | % | 2.1 | % | ||||||||
Selling, general and administrative expense |
||||||||||||||||
Americas, including corporate |
10,929 | 11,760 | 21,604 | 21,713 | ||||||||||||
EMEA |
6,019 | 6,670 | 12,522 | 12,820 | ||||||||||||
Asia-Pacific |
1,545 | 1,782 | 3,130 | 3,150 | ||||||||||||
Total selling general and administrative expense |
18,493 | 20,212 | 37,256 | 37,683 | ||||||||||||
Selling, general and administrative expense as a percentage of revenue |
23.9 | % | 29.0 | % | 25.9 | % | 28.4 | % | ||||||||
Total costs and expenses |
$ | 71,987 | $ | 68,920 | $ | 137,961 | $ | 130,312 | ||||||||
Geographical areas 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 six months ended June 30, 2010, consolidated revenues increased by $11.2 million, or 8.4%,
to $143.9 million, compared to $132.7 million for the six months ended June 30, 2009. Changes
related to foreign currency exchange rates favorably impacted revenues by $2.9 million, of which
$2.7 million, $0.1 million and $0.1 million were related to favorable impacts from Asia-Pacific,
EMEA, and Americas, respectively. Excluding the foreign currency exchange rate impact, revenues
increased by $8.3 million, or 6.2%, for the six months ended June 30, 2010 compared to the same
period in the prior year. This $8.3 million increase in revenues consisted of a $6.6 million
increase in the Americas and a $3.1 million increase in Asia-Pacific, partially offset by a $1.4
million decrease in EMEA. The increase in revenues in the Americas was due to increases in under
pressure services, which included volume increases in leak sealing and line stopping of
approximately 14.8% when compared to revenues in the same period in the prior year. Additionally,
revenues increased within other services by approximately 14.7% related to volume increases in
product and other manufacturing services, including a $4.7 million hot tapping equipment package
sale. The increase in revenues in Asia-Pacific was primarily attributable to increases in
turnaround services in Australia, which included volume increases in bolting services of
approximately 39.6% when compared to revenues in the same period in the prior year. The decrease in
revenues in EMEA was
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primarily attributable to volume decreases in other services of approximately
14.4% and primarily related to decreases within product and other manufacturing services. Partially
offsetting this decrease were increases in turnaround services, which included volume increases in
bolting services of approximately 6.4%, when compared to revenues in the same period in the prior
year.
For the three months ended June 30, 2010, consolidated revenues increased by $7.8 million, or
11.2%, to $77.5 million, compared to $69.7 million for the three months ended June 30, 2009.
Changes related to foreign currency exchange rates unfavorably impacted revenues by $0.4 million,
of which $1.6 million was related to unfavorable impacts in EMEA which were partially offset by
favorable impacts of $1.2 million in Asia-Pacific. Excluding the foreign currency exchange rate
impact, revenues increased by $8.2 million, or 11.7%, for the three months ended June 30, 2010
compared to the same period in the prior year. This $8.2 million increase in revenues consisted of
increases of $5.3 million, $1.7 million and $1.2 million in the Americas, Asia-Pacific and EMEA,
respectively. The increase in revenues in the Americas was due to increases in under pressure,
turnaround and other services, which primarily included volume increases in leak sealing services
of approximately 11.1%, bolting services of approximately 6.5% and product and other manufacturing
services of approximately 39.3% when compared to revenues in the same period in the prior year.
The increase in manufacturing and product sales includes a $4.7 million hot tapping equipment
package sale. The increase in revenues in Asia-Pacific was primarily attributable to increases in
turnaround services in Australia, which included volume increases in bolting services of
approximately 46.6% when compared to revenues in the same period in the prior year. The increase in
revenues in EMEA was attributable to volume increases in turnaround services of approximately
15.8%, which included volume increases in bolting and on-site machining services. Partially
offsetting this increase were decreases in other services of approximately 13.8% and primarily
related to decreases within product and other manufacturing services, when compared to revenues in
the same period in the prior year.
Operating Costs (exclusive of depreciation and amortization)
For the six months ended June 30, 2010, operating costs, including $0.7 million of restructuring
costs, increased $7.7 million, or 8.6%, to $97.5 million, compared to $89.8 million for the six
months ended June 30, 2009. Changes related to foreign currency exchange rates unfavorably impacted
costs by $1.9 million, of which $1.7 million, $0.1 million and $0.1 million were related to
unfavorable impacts from Asia-Pacific, EMEA and the Americas, respectively. Excluding the foreign
currency exchange rate impact, operating costs increased $5.8 million, or 6.5%, for the six months
ended June 30, 2010, compared to the same period in the prior year. This change consisted of a $3.9
million, $1.2 million, and a $0.7 million increase in the Americas, Asia-Pacific and EMEA,
respectively. The increase in operating costs in the Americas was primarily related to higher
material and labor costs of approximately 6.5% when compared to the same period in the prior year,
which were attributable to the increase in revenue. The increase in operating costs in Asia-Pacific
was primarily attributable to an increase in labor and material costs of approximately 9.5% when
compared to the same period in the prior year associated with the increased revenues in Australia.
The increase in EMEA was primarily due to $0.7 million of severance related restructuring costs.
For the three months ended June 30, 2010, operating costs increased $4.6 million, or 9.7%, to $51.9
million, compared to $47.3 million for the three months ended June 30, 2009. Changes related to
foreign currency exchange rates favorably impacted costs by $0.4 million, of which $1.2 million
related to favorable impacts from EMEA but were partially offset by unfavorable impacts of $0.8
million in Asia-Pacific. Excluding the foreign currency exchange rate impact, operating costs
increased $5.0 million, or 10.6% for the three months ended June 30, 2010, compared to the same
period in the prior year. This change consisted of a $3.5 million, $0.8 million, and a $0.7 million
increase in the Americas, Asia-Pacific and EMEA, respectively. The increase in operating costs in
the Americas was primarily related to higher material and labor costs of approximately 11.6% as
well as a slight increase in travel costs, when compared to the same period in the prior year,
which were attributable to the increase in revenue. The increase in operating costs in Asia-Pacific
was primarily attributable to an increase in labor and material costs of approximately 11.9% when
compared to the same period in the prior year associated with the increased revenues in Australia.
The increase in EMEA was primarily due increased labor and material costs of approximately 1%, when
compared to the same period in the prior year, consistent with the increase in revenue.
Operating costs as a percentage of revenue were 67.8% and 67.7% for the six months ended June 30,
2010 and 2009, respectively, and 67.0% and 67.8% for the three months ended June 30, 2010 and 2009,
respectively.
Depreciation and Amortization
For the three and six months ended June 30, 2010, depreciation and amortization expense increased
$0.1 million, or 8.6% and $0.3 million, or 11.8%, respectively, when compared to the same periods
in the prior year. Changes related to foreign currency exchange rates unfavorably impacted
depreciation and amortization expense by $0.1 million for the six months ended June 30, 2010, with
minimal impact for the three months ending June 30, 2010. Excluding the foreign currency exchange
rate impact, depreciation and
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amortization expense for the three and six months ended June 30, 2010
was $0.1 million and $0.2 million higher compared to the same periods in the prior year,
respectively, due to capital expenditures of approximately $7.0 million over the twelve-month
period ended June 30, 2010.
Depreciation and amortization expense as a percentage of revenue were 2.2% and 2.1% for the six
months ended June 30, 2010 and 2009, respectively, and 2.0% and 2.1% for the three months ended
June 30, 2010 and 2009, respectively.
Selling, General and Administrative
For the six months ended June 30, 2010, selling, general and administrative expenses, including
$2.0 million of restructuring costs, decreased $0.4 million, or 1.1%, to $37.3 million compared to
$37.7 million for the six months ended June 30, 2009. Changes related to foreign currency exchange
rates unfavorably impacted costs by $0.4 million, which were related to unfavorable impacts in
Asia-Pacific. Excluding the foreign currency exchange rate differences, selling, general and
administrative expenses decreased $0.8 million, or 2.1%, for the six months ended June 30, 2010,
compared to the same period in the prior year. This $0.8 million decrease in selling, general and
administrative costs consisted of a $0.4 million, $0.3 million and a $0.1 million decrease in
Asia-Pacific, EMEA and the Americas, respectively. In Asia-Pacific, decreases in selling, general
and administrative costs were primarily a result of reductions in salary and related cost and
travel expenses of approximately 8.3% when compared to the same period in the prior year. In EMEA,
decreases in selling, general and administrative costs were primarily a result of reductions in
salary and related costs of approximately 9.5% when compared to the same period in the prior year.
These decreases were substantially offset by restructuring costs of $1.6 million incurred in the
six months ended June 30, 2010, which included $1.0 million, $0.4 million and $0.2 million related
to severance and benefit costs, lease termination costs and other restructuring costs,
respectively. Selling, general and administrative expense in the Americas declined slightly as
reductions in costs of approximately 4.7% were substantially offset by $0.5 million of costs
incurred in connection with the retirement of the Companys former Chairman and Chief Executive
Officer, as well as severance related restructuring charges of $0.4 million, when compared to the
same period in the prior year.
For the three months ended June 30, 2010, selling, general and administrative expenses, including
$0.9 million of restructuring costs, decreased $1.7 million, or 8.5%, to $18.5 million compared to
$20.2 million for the three months ended June 30, 2009. Changes related to foreign currency
exchange rates favorably impacted costs by $0.2 million, of which $0.3 million were related to
favorable impacts in EMEA and were partially offset by unfavorable impacts of $0.1 million in
Asia-Pacific. Excluding the foreign currency exchange rate differences, selling, general and
administrative expenses decreased $1.5 million, or 7.4%, for the three months ended June 30, 2010,
compared to the same period in the prior year. This $1.5 million decrease in selling, general and
administrative costs consisted of a $0.8 million, $0.4 million and a $0.3 million decrease in the
Americas, Asia-Pacific and EMEA, respectively. The Americas decrease in selling, general and
administrative expenses was related to reductions in salary and related costs, rent and travel
expenses and other professional fees of approximately 5.7%, but was partially offset by additional
severance related restructuring charges of $0.2 million when compared to the same period in the
prior year. In Asia-Pacific, decreases in selling, general and administrative expenses were
primarily a result of reductions in salary and related cost and travel expenses of approximately
14.8% when compared to the prior year. Decreases in selling, general and administrative costs in
EMEA were primarily a result of reductions in salary and related costs of approximately 15.7% when
compared to the same period in the prior year. These decreases were offset by restructuring costs
of $0.7 million incurred in the three months ended June 30, 2010, which included $0.5 million, $0.1
million and $0.1 million related to severance and benefit costs, lease termination costs and other
restructuring costs, respectively.
As a result of the above factors, selling, general and administrative costs as a percentage of
revenues decreased to 23.9% and 25.9% for the three and six months ending June 30, 2010,
respectively, compared to 29.0% and 28.4% for the three and six months ended June 30, 2009,
respectively.
Other Income
Interest Expense
For both the three and six months ended June 30, 2010, consolidated interest expense decreased by
$0.1 million, when compared to the three and six months ended June 30, 2009. The decrease in
interest expense for both the three and six months ended June 30, 2010, resulted from a decrease in
average outstanding debt and interest rates when compared to the same periods in 2009.
Interest Income and Other Income (Expense), Net
For the three and six months ended June 30, 2010, interest income and other income (expense)
decreased $0.6 million and $0.1 million, respectively, when compared to the same periods in the
prior year. Interest income and other income (expense) primarily
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relates to foreign currency
exchange gains and losses, however, the three and six months ended June 30, 2009 include
approximately $0.3 million of income related to a release of environmental liabilities.
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 (ASC 740). As a result, substantially all domestic
federal income taxes, as well as certain state and foreign income taxes, recorded for the three and
six months ended June 30, 2010 and 2009 were fully offset by a corresponding change in valuation
allowance. The income tax expense recorded for the three and six months ended June 30, 2010 and
2009 consisted primarily of income taxes due in foreign and state jurisdictions of the Company.
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 expenses are 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.
For the three and six months ended June 30, 2010, income tax expense as a percentage of income
before income taxes decreased to 29.4% and 29.5%, respectively, compared to 71.8% and 46.4% for the
three and six months ended June 30, 2009, respectively. The changes in the rates are related to
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. The difference in mix, combined with the lower
level of income before income taxes, resulted in a significantly higher effective income tax rate
in 2009.
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 provided by operating activities was $0.5 million for the six months ended June 30, 2010
compared to $4.6 million for the six months ended June 30, 2009. The decrease in net cash provided
by operating activities was primarily due to changes in working capital requirements, driven by an
increase in accounts receivable, that decreased cash flows by $7.7 million for the six months ended
June 30, 2010 compared to an increase of approximately $1.0 million in the six months ended June
30, 2009. The changes are primarily due to the increase in revenues compared to the same period in
2009. The changes in operating assets and liabilities were partially offset by a $2.8 million
increase in net income in the six months ended June 30, 2010 as compared to the same period in
prior year. In addition, the Company paid approximately $1.5 million in the first quarter of 2010
related to an arbitration award settlement.
Net cash used in investing activities was $3.6 million for the six months ended June 30, 2010
compared to $3.4 million for the six months ended June 30, 2009. Investing activities primarily
consist of capital expenditures which totaled $3.5 million for the six months ended June 30, 2010
compared to $3.0 million for the same period in 2009. The increase in capital expenditures compared
to the prior year is due to the deferment of certain capital projects in 2009 due to the difficult
economic environment, as well as expenditures in the current year associated with the consolidation
of certain facilities as part of the Companys cost reduction initiatives.
Consolidated capital expenditures for fiscal year 2010 have been budgeted at $9.0 million to $11.0
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 2010 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 was $0.1 million for the six months ended June 30, 2010,
compared to $0.2 million for the six months ended June 30, 2009. Financing activities primarily
consisted of principal payments on long-term capital leases.
While the Companys operating results for the six months ended June 30, 2010 have improved as
compared to the same period last year, the effect of the global financial crisis continues to
impact the worldwide economy, including the markets in which the Company operates, in varying
degrees, and as such, the Company believes that the risks to its business and its customers remain
heightened.
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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 could
continue to negatively affect 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. and subsidiaries (FWI), a wholly owned subsidiary of
the Parent Company, and certain foreign subsidiaries (the designated borrowers) of FWI entered
into a new credit agreement dated July 31, 2009 with Bank of America, N.A. (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.
The proceeds from the initial borrowing on the credit agreement were $35.0 million and were used to
pay the amounts outstanding under the previous loan agreement, which was scheduled to mature in
January 2010, at which time the previous loan agreement was terminated by the Company. Letters of
credit issued from the previous loan agreement were replaced with similar letters of credit by the
credit agreement. There were no material circumstances surrounding the termination and no material
early termination penalties were incurred by FWI.
As of June 30, 2010 and December 31, 2009, $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 were 2.6% and 2.5% at June 30, 2010 and December
31, 2009, respectively. 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 June 30, 2010, 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 $121.5 million of current assets and property and equipment as of June 30,
2010) 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 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 June 30, 2010, FWI was in compliance
with all covenants under the credit agreement.
Considering the outstanding borrowings of $30.0 million, and $5.5 million related to outstanding
letters of credit, the unused borrowing capacity under the credit agreement was $14.5 million at
June 30, 2010, with a limit of $5.0 million of this capacity remaining for the designated
borrowers.
The Company committed to cost reduction initiatives at the end of 2009 and in the first half of
2010 in order to more strategically align the Companys operating, selling, general and
administrative costs relative to revenues. As of June 30, 2010, the costs incurred since the
inception of these cost reduction initiatives totaled approximately $3.8 million. During the six
months ended June 30, 2010, the Company incurred restructuring charges of $2.7 million and made
cash payments of $2.6 million related to these initiatives. As of June 30, 2010, the remaining
reserve associated with these initiatives totaled $0.8 million with estimated additional charges to
be incurred of approximately $3.6 million, all of which are expected to require cash payments.
Total workforce reductions, which began in the fourth quarter of 2009, included terminations for
117 employees, which include reductions of 27 employees in the Americas, 89 employees in EMEA, and
one employee in Asia-Pacific.
On November 27, 2000, the Board of Directors of the Company authorized the distribution of its
pipeline, terminaling and product marketing business (the Distribution) to its stockholders in
the form of a new limited liability company, Kaneb Services LLC (KSL). On June 29, 2001, the
Distribution was completed, with each shareholder of the Company receiving one common share of KSL for each three shares of the Companys common stock held on June 20, 2001, the record date for
the Distribution, resulting in the distribution of approximately 10,850,000 KSL common shares.
Pursuant to the Distribution, the Company entered into an agreement (the Distribution Agreement)
with KSL, whereby KSL is obligated to pay the Company amounts equal to certain expenses and tax
liabilities incurred by the Company in connection with the Distribution. The Distribution Agreement
also requires KSL to pay the Company an amount calculated based on any income tax liability of the
Company that, in the sole judgment of the Company, (i) is attributable to increases in income tax
from past years arising out of adjustments required by federal and state tax authorities, to the
extent that such increases are properly allocable to the businesses that became part of KSL, or
(ii) is attributable to the distribution of KSLs common shares and the operations of
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KSLs
businesses prior to the Distribution date. In the event of an examination of the Company by federal
or state tax authorities, the Company will have unfettered control over the examination,
administrative appeal, settlement or litigation that may be involved, notwithstanding that KSL has
agreed to pay any additional tax. KSL was purchased by Valero L.P. in July 2005 and KSLs
obligations under the Distribution Agreement were assumed by Valero L.P. During 2006, accrued
income taxes and the receivable from businesses distributed to common stockholders were both
reduced by $4.6 million related to the expiration of statutes for previously provided tax
exposures. The receivable from businesses distributed to common stockholders was further reduced in
2006 by $0.5 million by adjusting retained earnings for KSL previously provided tax exposures. At
each of June 30, 2010 and December 31, 2009, $1.4 million was recorded as receivable from
businesses distributed to common stockholders pursuant to the provisions of the Distribution
Agreement.
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 existing debt facilities, 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,
2009.
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 except for restructuring accruals in the six months ended June
30, 2010, include revenue recognition, allowance for doubtful accounts, goodwill and intangible
assets, stock-based compensation, income taxes, defined benefit pension plan, and contingencies.
Critical accounting policies are discussed regularly, at least quarterly, with the Companys Audit
Committee.
Revenue Recognition
Revenues are recorded in accordance with FASB 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.
Revenues under long-term service contracts, generally greater than six months, are accounted for
using a proportional performance method or on a straight-line basis. The Company recognizes
revenues on a proportional basis when a contract consists of milestones or activities that are
process-related and has no other material deliverables. The Company recognizes revenues on a
straight-line basis when billing terms and performance of the contract are substantially equivalent
throughout the life of the contract.
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 (ASC 350). Under ASC 350, intangible assets with
lives restricted by contractual, legal or other means are amortized over their useful lives. At
June 30, 2010 and December 31, 2009, the Company had no significant intangible assets subject to
amortization under ASC 350. Goodwill and other intangible assets not subject to amortization are
tested for impairment annually, 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 two reporting units, Furmanite and Xtria for the purpose of testing goodwill
impairment, as the operating results of these components are reviewed separately by management and
cannot be aggregated. All goodwill of the Company relates to Furmanite, accordingly, impairment of
goodwill is tested for that reporting unit. 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, and
reconciles the aggregate fair values of its reporting units to the enterprise market
capitalization. Management considers this approach the most meaningful measure as substantially all
of the Companys fair value is attributable to the Furmanite reporting unit and the quoted market
price provides the best evidence of fair value. In performing the reconciliation, the Company uses
the stock price on December 31 of each year as the valuation date. On December 31, 2009,
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 (ASC 360). Under 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
The Company adopted the provisions of ASC 740-10-65 on January 1, 2007. The adoption of ASC
740-10-65 had no net impact on the Companys tax reserves during 2007. 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.
Deferred tax assets and liabilities result from temporary differences between the U.S. GAAP and tax
treatment of certain income and expense items. The Company must assess and make estimates regarding
the likelihood that the deferred tax assets will be recovered.
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To the extent that it is determined
the deferred tax assets will not be recovered, a valuation allowance 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.
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 renewed 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 management
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.
Restructuring
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 consolidation 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
estimated 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.
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.
In February 2010, the FASB issued Accounting Standards Update 2010-09, Amendments to Certain
Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 amends the guidance issued in
ASC 855, Subsequent Events, by not requiring SEC filers to disclose the date through which an
entity has evaluated subsequent events. ASU 2010-09 was effective upon issuance. There was not a
material impact from the adoption of this guidance on the Companys consolidated financial
statements.
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Off-Balance Sheet Transactions
The Company was not a party to any off-balance sheet transactions at June 30, 2010 or December 31,
2009, or for the six months ended June 30, 2010.
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 June 30, 2010, 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 operations of the Company in Australia,
Bahrain, Belgium, Canada, China, France, Germany, Hong Kong, Malaysia, The Netherlands, New
Zealand, Nigeria, Norway, Singapore and the United Kingdom. Overall volatility in currency exchange
rates has increased over the past couple of years, and while currencies in the first half of 2010
were not as volatile as in recent periods, foreign currencies exchange rate changes, primarily the
Euro, the Australian Dollar and British Pound, relative to the U.S. dollar resulted in an
unfavorable impact on the Companys U.S. dollar reported revenues for the six months ended June 30,
2010, but a slightly favorable impact for the three months ended June 30, 2010 when compared to the
same periods of 2009. 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 six months ended June 30, 2010, foreign currency-based revenues and operating income
of $75.8 million and $6.0 million, respectively, a ten percent fluctuation of all applicable
foreign currencies would result in a change in revenues and operating income of $6.9 million and
$0.5 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 June 30, 2010. 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 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 June 30, 2010, our 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 $1.2
million and $1.3 million at June 30, 2010 and December 31, 2009, 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. 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 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 and $3.4 million were recorded in accrued expenses as of June 30, 2010 and December 31,
2009, respectively.
Item 1A. Risk Factors
During the quarter ended June 30, 2010, 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, 2009.
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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). | |
4.4
|
Consulting Agreement, dated April 7, 2010, among Furmanite Corporation and Michael L. Rose, the Companys former Chief Executive Officer, as Consultant, incorporated by reference herein to Exhibit 4.4 to the Registrants Form 10-Q for the quarter ended March 31, 2010. | |
10.1
|
Credit Agreement, dated July 31, 2009, among Furmanite Worldwide, Inc. and certain subsidiaries, as Borrowers, Bank of America, N.A. as Administrative Agent, Compass Bank as Syndication Agent and the Lenders party thereto, incorporated by reference herein to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on August 7, 2009. | |
10.2
|
Guaranty and Collateral Agreement, dated July 31, 2009, among Furmanite Worldwide, Inc. and each of the other grantors (as defined therein) in favor of Bank of America, N.A. as Administrative Agent incorporated by reference herein to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on August 7, 2009. | |
31.1*
|
Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 6, 2010. | |
31.2*
|
Certification of Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 6, 2010. | |
32.1*
|
Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 6, 2010. | |
32.2*
|
Certification of Principal Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 6, 2010. |
* | Filed herewith. |
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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 Officer) |
||||
Date: August 6, 2010
32