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EX-31.1 - EXHIBIT 31.1 - FURMANITE CORPfrm-ex311x20140930xq3.htm
EX-32.1 - EXHIBIT 32.1 - FURMANITE CORPfrm-ex321x20140930xq3.htm
EX-31.2 - EXHIBIT 31.2 - FURMANITE CORPfrm-ex312x20140930xq3.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     

Commission File Number 001-05083
 
FURMANITE CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
74-1191271
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
10370 Richmond Avenue
Suite 600
Houston, Texas
 
77042
(Address of principal executive offices)
 
(Zip Code)
(713) 634-7777
(Registrant’s telephone number, including area code)
Not Applicable
(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.  x  Yes    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).  x  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.
 
 
 
 
 
 
 
 
Large accelerated filer
 
o
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
There were 37,675,010 shares of the registrant’s common stock outstanding as of October 29, 2014.
 




FURMANITE CORPORATION AND SUBSIDIARIES
INDEX
 
 
 
 
 
  
Page
Number
  
  
 
  
 
  
  
  
  
  
  
  
  
  
 
 
  
 
  
  
  
 

2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) may contain forward-looking statements within the meaning of sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Report, including, but not limited to, statements regarding the Company’s future financial position, business strategy, budgets, projected costs, savings and plans, and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. The Company bases its forward-looking statements on reasonable beliefs and assumptions, current expectations, estimates and projections about itself and its industry. The Company cautions that these statements are not guarantees of future performance and involve certain risks and uncertainties that cannot be predicted, including, without limitation, the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. In addition, the Company based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate and actual results may differ materially from those expressed or implied by the forward-looking statements. One is cautioned not to place undue reliance on such statements, which speak only as of the date of this Report. Unless otherwise required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances, or otherwise.

3


PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,296

 
$
33,240

Accounts receivable, trade (net of allowance for doubtful accounts of $899 and $1,014 as of September 30, 2014 and December 31, 2013, respectively)
105,649

 
106,853

Inventories, net:
 
 
 
Raw materials and supplies
25,949

 
25,202

Work-in-process
15,223

 
10,010

Finished goods
92

 
231

Deferred tax assets, current
8,681

 
8,665

Prepaid expenses and other current assets
9,398

 
12,494

Total current assets
207,288

 
196,695

Property and equipment
113,437

 
110,221

Less: accumulated depreciation and amortization
(60,635
)
 
(54,874
)
Property and equipment, net
52,802

 
55,347

Goodwill
15,648

 
15,524

Deferred tax assets, non-current
3,661

 
4,321

Intangible and other assets, net
10,940

 
13,280

Total assets
$
290,339

 
$
285,167

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
2,402

 
$
2,111

Accounts payable
20,343

 
20,895

Accrued expenses and other current liabilities
39,784

 
38,312

Income taxes payable
1,238

 
1,205

Total current liabilities
63,767

 
62,523

Long-term debt, non-current
61,990

 
63,196

Net pension liability
15,983

 
17,905

Other liabilities
8,023

 
8,047

Commitments and contingencies (Note 12)


 


Stockholders’ equity:
 
 
 
Series B Preferred Stock, unlimited shares authorized, none issued and outstanding

 

Common stock, no par value; 60,000,000 shares authorized; 41,683,973 and 41,557,238 shares issued as of September 30, 2014 and December 31, 2013, respectively
4,826

 
4,811

Additional paid-in capital
137,548

 
135,881

Retained earnings
33,014

 
26,429

Accumulated other comprehensive loss
(16,799
)
 
(15,612
)
Treasury stock, at cost (4,008,963 shares)
(18,013
)
 
(18,013
)
Total stockholders’ equity
140,576

 
133,496

Total liabilities and stockholders’ equity
$
290,339

 
$
285,167

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

4


FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
124,129

 
$
99,523

 
$
395,312

 
$
296,937

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
94,256

 
71,851

 
298,130

 
206,279

Depreciation and amortization expense
3,168

 
2,724

 
9,145

 
8,232

Selling, general and administrative expense
24,426

 
20,501

 
74,936

 
62,277

Total costs and expenses
121,850

 
95,076

 
382,211

 
276,788

Operating income
2,279

 
4,447

 
13,101

 
20,149

Interest income and other income (expense), net
172

 
(420
)
 
(432
)
 
(272
)
Interest expense
(468
)
 
(377
)
 
(1,362
)
 
(933
)
Income before income taxes
1,983

 
3,650

 
11,307

 
18,944

Income tax expense
(921
)
 
(1,530
)
 
(4,722
)
 
(7,499
)
Net income
$
1,062

 
$
2,120

 
$
6,585

 
$
11,445

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.06

 
$
0.18

 
$
0.31

Diluted
$
0.03

 
$
0.06

 
$
0.17

 
$
0.30

Weighted-average number of common and common equivalent shares used in computing earnings per common share:
 
 
 
 
 
 
 
Basic
37,659

 
37,431

 
37,615

 
37,392

Diluted
37,905

 
37,715

 
37,856

 
37,586

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


5


FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
1,062

 
$
2,120

 
$
6,585

 
$
11,445

Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
Prior service cost arising during period

 
18

 

 
(5
)
Net gain (loss) arising during period
1,263

 
(949
)
 
838

 
1,150

Less: Amortization of prior service credit included in net periodic pension cost

 
(24
)
 

 
(71
)
Defined benefit pension plans, net
1,263

 
(955
)
 
838

 
1,074

Cash flow hedges:
 
 
 
 
 
 
 
Gain (loss) on interest rate swap
108

 
(253
)
 
(124
)
 
250

Less: Reclassification of realized loss on interest rate swap included in interest expense
59

 

 
99

 

Cash flow hedges, net
167

 
(253
)
 
(25
)
 
250

Foreign currency translation adjustments
(3,499
)
 
2,406

 
(1,832
)
 
(1,137
)
Total other comprehensive income (loss) before tax
(2,069
)
 
1,198

 
(1,019
)
 
187

Income tax benefit (expense) related to components of other comprehensive income (loss)
(336
)
 
331

 
(168
)
 
(358
)
Other comprehensive income (loss), net of tax
(2,405
)
 
1,529

 
(1,187
)
 
(171
)
Comprehensive income (loss)
$
(1,343
)
 
$
3,649

 
$
5,398

 
$
11,274

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


6


FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2014 (Unaudited) and Year Ended December 31, 2013
(in thousands, except share data)
 
 
Common Shares
 
Common
 
Additional
Paid-In
 
Retained
 
Accumulated
Other
Comprehensive
 
Treasury
 
Total
 
Issued
 
Treasury
 
Stock
 
Capital
 
Earnings
 
Loss
 
Stock
 
Balances at January 1, 2013
41,329,538

 
4,008,963

 
$
4,783

 
$
134,521

 
$
12,402

 
$
(14,614
)
 
$
(18,013
)
 
$
119,079

Net income

 

 

 

 
14,027

 

 

 
14,027

Stock-based compensation, stock option exercises and vesting of restricted stock
227,700

 

 
28

 
1,360

 

 

 

 
1,388

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

 

 

 

 

 
(97
)
 

 
(97
)
Unrealized gain on interest rate swap, net of tax

 

 

 

 

 
132

 

 
132

Foreign currency translation adjustment

 

 

 

 

 
(1,033
)
 

 
(1,033
)
Balances at December 31, 2013
41,557,238

 
4,008,963

 
$
4,811

 
$
135,881

 
$
26,429

 
$
(15,612
)
 
$
(18,013
)
 
$
133,496

Net income

 

 

 

 
6,585

 

 

 
6,585

Stock-based compensation, stock option exercises and vesting of restricted stock
126,735

 

 
15

 
1,667

 

 

 

 
1,682

Change in pension net actuarial loss, net of tax

 

 

 

 

 
660

 

 
660

Unrealized loss on interest rate swap, net of tax

 

 

 

 

 
(15
)
 

 
(15
)
Foreign currency translation adjustment

 

 

 

 

 
(1,832
)
 

 
(1,832
)
Balances at September 30, 2014
41,683,973

 
4,008,963

 
$
4,826

 
$
137,548

 
$
33,014

 
$
(16,799
)
 
$
(18,013
)
 
$
140,576

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


7


FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
6,585

 
$
11,445

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,145

 
8,232

Provision for doubtful accounts
27

 
149

Stock-based compensation expense
1,748

 
1,369

Deferred income taxes
474

 
4,630

Other, net
(674
)
 
38

Changes in operating assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable
932

 
(13,207
)
Inventories
(5,947
)
 
(6,037
)
Prepaid expenses and other current assets
4,409

 
2,355

Accounts payable
(659
)
 
(1,771
)
Accrued expenses and other current liabilities
1,406

 
4,542

Income taxes payable
(1,535
)
 
(199
)
Other, net
32

 
(340
)
Net cash provided by operating activities
15,943

 
11,206

Investing activities:
 
 
 
Capital expenditures
(5,172
)
 
(13,496
)
Acquisition of businesses
(265
)
 
(16,695
)
Proceeds from sale of assets
17

 
30

Net cash used in investing activities
(5,420
)
 
(30,161
)
Financing activities:
 
 
 
Proceeds from issuance of debt

 
20,000

Payments on debt
(916
)
 
(2,180
)
Issuance of common stock
148

 
332

Other
(214
)
 
(61
)
Net cash (used in) provided by financing activities
(982
)
 
18,091

Effect of exchange rate changes on cash
(485
)
 
(623
)
Increase (decrease) in cash and cash equivalents
9,056

 
(1,487
)
Cash and cash equivalents at beginning of period
33,240

 
33,185

Cash and cash equivalents at end of period
$
42,296

 
$
31,698

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
1,081

 
$
805

Cash paid for income taxes, net of refunds received
$
5,012

 
$
1,747

Non-cash investing and financing activities:
 
 
 
Issuance of notes payable related to acquisition of businesses
$

 
$
5,801

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

8


FURMANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)

1. General and Summary of Significant Accounting Policies

General

The consolidated interim financial statements include the accounts of Furmanite Corporation (the “Parent Company”) and its subsidiaries (collectively, the “Company” or “Furmanite”). All intercompany transactions and balances have been eliminated in consolidation. These unaudited consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnote disclosures required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) and accruals, necessary for a fair presentation of the financial statements, have been made. Interim results of operations are not necessarily indicative of the results that may be expected for the full year.

Revenue Recognition

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

Revenues are recognized using the completed-contract method, when persuasive evidence of an arrangement exists, services to customers have been rendered or products have been delivered, the selling price is fixed or determinable and collectability is reasonably assured. Revenues are recorded net of sales tax. Substantially all projects are short term in nature; however, the Company occasionally enters into contracts that are longer in duration that represent multiple element arrangements, which include a combination of services and products. The Company separates deliverables into units of accounting based on whether the deliverables have standalone value to the customer. The arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price generally determined using vendor specific objective evidence. Revenues are recognized for the separate units of accounting when services to customers have been rendered or products have been delivered and risk of ownership has passed to the customer. The Company provides limited warranties to customers, depending upon the service performed. Warranty claim costs were not material during either of the three or nine months ended September 30, 2014 or 2013.

Inventories

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

Operating Costs

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

Selling, General and Administrative Expenses

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


9


Income Taxes

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

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

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

The tax benefit from uncertain tax positions is recognized 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 where unrecognized non-current tax benefits are offset by fully reserved net operating loss carryforwards. 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.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the guidance. There is no option for early adoption. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

2. Acquisition

On August 30, 2013, Furmanite America, Inc. (“Furmanite America”), a wholly owned subsidiary of the Company, completed the acquisition of certain assets and the assumption of certain liabilities, all of which relate to operations in the Americas, of the Engineering and Construction segment of ENGlobal Corporation (“ENGlobal”) for a total consideration of approximately $18.8 million. In conjunction with the closing of the transaction, the Company’s Furmanite Technical Solutions division was formed, which is included within the Company’s Engineering & Project Solutions segment. Assets purchased and liabilities assumed by Furmanite America include working capital assets and liabilities, property and equipment, intangible assets and lease obligations. The purchase was made pursuant to an Asset Purchase Agreement (“APA”) dated July 15, 2013, with an amendment to the APA reducing the purchase price for the changes in the estimated net working capital balance and $0.5 million, and finalizing the terms and conditions of the transaction. On August 30, 2013, Furmanite America made a cash payment of approximately $15.8 million for the estimated acquired net working capital, net of reserves. The working capital payment is subject to adjustment, which was initially to be determined within 90 days from the close of the transaction, for any changes based upon the final balance sheet, however, by mutual agreement of the parties, the determination date has been extended. In addition, Furmanite America entered into a four-year 4% interest per annum promissory note with ENGlobal in the principal amount of $3.0 million. In connection with the acquisition, the Company borrowed $20.0 million on its existing revolving credit facility, principally to fund the purchase of the acquired working capital, with the remaining funds to be available to cover any transitional initial cash flow needs.

10



The following amounts represent the fair value of the assets acquired and liabilities assumed (in thousands):
Fair value of net assets acquired
 
Accounts receivable 1
$
20,401

Prepayments and other current assets
562

Property and equipment
2,401

Intangible assets 2
1,282

Deferred tax assets
1,318

Accounts payable
(161
)
Accrued expenses and other current liabilities
(9,744
)
Other non-current liabilities
(237
)
Fair value of net assets acquired
15,822

Estimated receivable for working capital adjustment
2,968

Total purchase consideration
$
18,790

____________________________
1    Accounts receivable amount is net of an estimate of a $0.4 million reserve for doubtful accounts.
2    Intangible assets are comprised of customer contracts.

For both the three and nine months ended September 30, 2013, the consolidated statements of income include operating revenues of $9.5 million attributable to the acquisition since the date of closing. The effect of the acquisition on net income was insignificant for the three and nine months ended September 30, 2013.

3. Earnings Per Share

Basic earnings per share (“EPS”) are calculated as net income divided by the weighted-average number of shares of common stock outstanding during the period, which includes restricted stock. Restricted shares of the Company’s common stock have full voting rights and participate equally with common stock in dividends declared, if any, and undistributed earnings. As participating securities, the shares of restricted stock are included in the calculation of basic EPS using the two-class method. For the periods presented, the amount of earnings allocated to the participating securities was not material. Diluted earnings per share assumes issuance of the net incremental shares from stock options and restricted stock units 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 and restricted stock units, 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):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
1,062

 
$
2,120

 
$
6,585

 
$
11,445

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
37,659

 
37,431

 
37,615

 
37,392

Dilutive effect of common stock equivalents
246

 
284

 
241

 
194

Diluted weighted-average common shares outstanding
37,905

 
37,715

 
37,856

 
37,586

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.06

 
$
0.18

 
$
0.31

Dilutive
$
0.03

 
$
0.06

 
$
0.17

 
$
0.30

Stock options and restricted stock units excluded from diluted weighted-average common shares outstanding because their inclusion would have an anti-dilutive effect:
395

 
565

 
323

 
862



11


4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Compensation and benefits
$
25,467

 
$
26,557

Customer deposits
2,966

 
1,370

Estimated potential uninsured liability claims
1,934

 
1,934

Value added tax payable
1,802

 
1,622

Taxes other than income
1,723

 
1,621

Leases
1,692

 
1,478

Professional, audit and legal fees
1,117

 
1,451

Other employee related expenses
657

 
373

Interest
322

 
141

Other
2,104

 
1,765

 
$
39,784

 
$
38,312



5. Restructuring

The Company committed to certain cost reduction initiatives during 2010 and 2012, including planned workforce reductions and restructuring of certain functions. The Company took these specific actions in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues.

2010 Cost Reduction Initiative

The Company committed to a cost reduction initiative in 2010 (the “2010 Cost Reduction Initiative”), primarily related to the restructuring of certain functions within the Company’s EMEA operations (which include operations in Europe, the Middle East and Africa) in order to improve the operational and administrative efficiency of its EMEA operations. The Company had substantially completed the 2010 Cost Reduction Initiative at the end of 2012, with total costs incurred since its inception of approximately $3.9 million. As of September 30, 2014, future cash payments of approximately $0.3 million are expected in connection with this initiative, all of which are expected to be paid within the next twelve months. The Company incurred a reduction in restructuring costs of $0.1 million during the nine months ended September 30, 2014 related to this initiative. There were no restructuring costs incurred during the three months ended September 30, 2014 or 2013 nor for the nine months ended September 30, 2013 related to this initiative.

2012 Cost Reduction Initiative

In 2012, the Company committed to another cost reduction initiative (the “2012 Cost Reduction Initiative”) related to further restructuring of its European operations within EMEA. This restructuring initiative included additional workforce reductions throughout the Company’s operating, selling, general and administrative functions. The Company has taken these specific actions in order to further reduce administrative and overhead expenses and streamline its European operations’ structure for improved operational efficiencies in the wake of the continued challenging economic conditions in the region. The Company had substantially completed the 2012 Cost Reduction Initiative at the end of 2012, with total restructuring costs incurred since inception of approximately $3.3 million, which primarily related to one-time termination benefits. Future cash payments in connection with this initiative are expected to be insignificant. There were no restructuring costs incurred for either the three or nine months ended September 30, 2014 or 2013 related to this initiative.

Estimated and actual expenses including severance, lease cancellations, and other restructuring costs, in connection with these initiatives, have been recognized in accordance with FASB ASC 420-10, Exit or Disposal Cost Obligations, and FASB ASC 712-10, Nonretirement Postemployment Benefits.


12


The activity related to reserves associated with the cost reduction initiatives for the nine months ended September 30, 2014, is as follows (in thousands): 
 
Reserve at December 31,
2013
 
Charges (Adjustments)
 
Cash
(payments) refunds
 
Foreign 
currency
adjustments
 
Reserve at September 30, 2014
2010 Cost Reduction Initiative
 
 
 
 
 
 
 
 
 
Severance and benefit costs
$
330

 
$
(55
)
 
$
57

 
$
(23
)
 
$
309

Lease termination costs
24

 

 

 
(1
)
 
23

Other restructuring costs
1

 

 

 

 
1

2012 Cost Reduction Initiative
 
 
 
 
 
 
 
 
 
Severance and benefit costs
2

 

 

 

 
2

Lease termination costs
34

 

 

 
(2
)
 
32

Other restructuring costs

 

 

 

 

Total
$
391

 
$
(55
)
 
$
57

 
$
(26
)
 
$
367


Total workforce reductions related to the 2010 and 2012 Cost Reduction Initiatives included terminations of 138 employees, all of which are related to the EMEA region of the Company’s Technical Services segment.

6. Long-Term Debt

Long-term debt consists of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Borrowings under the revolving credit facility (the “Credit Agreement”)
$
59,300

 
$
59,300

Capital leases
13

 
23

Notes payable
4,896

 
5,801

Other debt
183

 
183

Total long-term debt
64,392

 
65,307

Less: current portion of long-term debt
(2,402
)
 
(2,111
)
Total long-term debt, non-current
$
61,990

 
$
63,196


Credit Facilities

On March 5, 2012, certain foreign subsidiaries (the “foreign subsidiary designated borrowers”) of Furmanite Worldwide, Inc. (“FWI”), a wholly owned subsidiary of the Company, and FWI entered into a credit agreement with a banking syndicate led by JPMorgan Chase Bank, N.A., as Administrative Agent (the “Credit Agreement”). The Credit Agreement matures on February 28, 2017. On August 27, 2013, FWI and the foreign subsidiary designated borrowers entered into an Amendment (the “Amendment”) to the Credit Agreement. The Amendment includes several modifications, including increasing the revolving credit facility from $75.0 million to $100.0 million and increasing the portion of the amount available for swing line loans to FWI from $7.5 million to $10.0 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. The loans outstanding to the foreign subsidiary designated borrowers under the Credit Agreement may not exceed $50.0 million in the aggregate.

At both September 30, 2014 and December 31, 2013, $59.3 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 Adjusted EBITDA ratio (the “Leverage Ratio” as defined in the Credit Agreement)), which was 1.9% at September 30, 2014. On April 30, 2013, the Company entered into a forward-dated interest rate swap to mitigate the risk of changes in the variable interest rate. The effect of the swap is to fix the interest rate at 0.75% plus the margin and Leverage Ratio adjustment, as described above, beginning April 29, 2014 through February 28, 2017 on $39.3 million of the outstanding amount under the Credit Agreement. See Note 10 for further information regarding the interest rate swap. The Credit Agreement contains a commitment fee, which ranges from 0.25% to 0.30% based on the Leverage Ratio (0.25% at September 30, 2014), and is based on the unused portion of the amount available under the Credit Agreement. Adjusted EBITDA is net income (loss) plus interest, income taxes, depreciation and amortization, and other non-cash expenses minus income tax credits and non-cash items increasing net income (loss) as defined

13


in 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 FWI and certain of its subsidiaries’ assets (which approximated $209.0 million as of September 30, 2014). The Parent Company has granted a security interest in its stock of FWI as collateral security for the lenders under the Credit Agreement, but is not a party to the Credit Agreement.

The Credit Agreement includes financial covenants, which require that the Company maintain: (i) a Leverage Ratio of no more than 2.75 to 1.00 as of the last day of each fiscal quarter, measured on a trailing four-quarters basis, (ii) a fixed charge coverage ratio of at least 1.25 to 1.00, defined as Adjusted EBITDA minus capital expenditures / interest plus cash taxes plus scheduled payments of debt plus Restricted Payments made (i.e., all dividends, distributions and other payments in respect of capital stock, sinking funds or similar deposits on account thereof or other returns of capital, redemption or repurchases of equity interests, and any payments to the Parent Company or its subsidiaries (other than FWI and its subsidiaries)), and (iii) a minimum asset coverage of at least 1.50 to 1.00, defined as cash plus net accounts receivable plus net inventory plus net property, plant and equipment of FWI and its material subsidiaries that are subject to a first priority perfected lien in favor of the Administrative Agent and the Lenders / Funded Debt. FWI is also subject to certain other compliance provisions including, but not limited to, restrictions on indebtedness, guarantees, dividends and other contingent obligations and transactions. Events of default under the Credit Agreement include customary events, such as change of control, breach of covenants or breach of representations and warranties. At September 30, 2014, FWI was in compliance with all covenants under the Credit Agreement.

Considering the outstanding borrowings of $59.3 million, and $2.0 million related to outstanding letters of credit, the unused borrowing capacity under the Credit Agreement was $38.7 million at September 30, 2014.

Notes Payable and Other Debt

On August 30, 2013, in connection with the acquisition of the assets of ENGlobal’s Engineering & Construction segment, the Company issued a $3.0 million promissory note, which bears interest at 4.0% per annum and is due in four equal annual installments of $0.8 million beginning September 1, 2014, with the final payment due on September 1, 2017.

On February 28, 2013, in connection with an asset purchase, the Company issued a $0.9 million note payable, which was paid at maturity on March 1, 2014.

On January 1, 2013, in connection with an asset purchase, the Company issued a $1.9 million promissory note, which bears interest at 5.0% per annum and is due in four equal annual installments of $0.5 million beginning January 1, 2014, with the final installment payment due on January 1, 2017.

In 2012, the Company incurred $1.4 million of debt in connection with an asset purchase. As of September 30, 2014 and December 31, 2013, $0.2 million remained outstanding, which is payable in installments of approximately $0.1 million due in both 2014 and 2015.

On February 23, 2011, in connection with the acquisition of Self Leveling Machines, Inc. and certain assets of Self Levelling Machines Pty. Ltd., the Company issued $5.1 million ($2.9 million denominated in U.S. dollars and $2.2 million denominated in Australian dollars) of notes payable (the “SLM Notes”), payable in installments through February 23, 2013. All obligations under the SLM Notes were secured by a first priority lien on the assets acquired in the acquisition. Upon full settlement of the SLM Notes in February 2013 and resultant release of the lien by the sellers’ equity holders, the acquired assets became assets secured under the Credit Agreement. The SLM Notes bore interest at a fixed rate of 2.5% per annum.

7. Retirement Plans

Two of the Company’s foreign subsidiaries have defined benefit pension plans, one plan covering certain of its United Kingdom employees (the “U.K. Plan”) and the other covering certain of its Norwegian employees (the “Norwegian Plan”). As the Norwegian Plan represents less than three percent of both the Company’s total pension plan liabilities and total pension plan assets, 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.


14


Net periodic pension cost for the U.K. and Norwegian Plans includes the following components (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
76

 
$
218

 
$
233

 
$
656

Interest cost
1,025

 
861

 
3,082

 
2,577

Expected return on plan assets
(1,102
)
 
(881
)
 
(3,315
)
 
(2,635
)
Amortization of prior service credit

 
(24
)
 

 
(71
)
Amortization of net actuarial loss
125

 
334

 
377

 
998

Net periodic pension cost
$
124

 
$
508

 
$
377

 
$
1,525


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: 6.2% overall, 7.6% for equities and 4.1% for bonds. The Company expects to contribute $1.7 million to the pension plan for 2014, of which $1.3 million has been contributed through September 30, 2014.

8. Stock-Based Compensation

The Company has equity compensation plans and agreements for officers, directors and key employees which allow for the issuance of stock options, restricted stock, restricted stock units and stock appreciation rights. For the three and nine months ended September 30, 2014, the total compensation cost charged against income and included in selling, general and administrative expenses for stock-based compensation arrangements was $0.9 million and $1.7 million, respectively, and $0.7 million and $1.4 million for the three and nine months ended September 30, 2013, respectively. Included in compensation cost for the three and nine months ended September 30, 2014 is $0.5 million in expense associated with the modification of certain outstanding equity awards pursuant to the provisions of a retirement agreement with a Company executive entered into during the third quarter of 2014. Under the terms of such modification, the executive’s nonvested awards will vest upon continued provision of service through the end of 2014. Additionally, the exercise period of certain outstanding stock options will be extended to allow for exercise up to one year after the executive’s retirement. The total cost of the modification was $1.0 million and is being recognized over the requisite service period of the modified awards through the end of 2014.

During the first quarter of 2014, the Company granted an aggregate of 24,000 shares of restricted stock awards to its outside directors at a grant date fair value of $11.58 per share, while 20,000 shares of restricted stock awards granted previously to the outside directors vested. Additionally, the vesting of 44,364 restricted stock units previously granted to employees resulted in the issuance of 32,386 shares of common stock, net of 11,978 shares that were withheld for tax obligations of the grantees, as allowed under the plan. During the second quarter of 2014, the Company granted to certain employees an aggregate of 214,418 restricted stock units and options to purchase an aggregate of 133,866 shares of its common stock with a weighted-average grant date fair value of $10.85 and $6.24 per share, respectively. Of the total restricted stock units granted, 65,381 are subject to forfeiture unless certain performance objectives are achieved. During the third quarter of 2014, the Company granted 10,000 shares of restricted stock awards to an outside director at a grant date fair value of $10.32 per share.

During the first quarter of 2013, the Company granted 30,000 shares of restricted stock awards to its outside directors at a grant date fair value of $6.05 per share, while 40,000 shares of restricted stock awards granted previously to the outside directors vested. Additionally, during the first quarter of 2013 the Company granted 35,000 stock options to an employee at a grant date fair value of $3.51 per share. Also during the first quarter of 2013, the vesting of 46,403 restricted stock units previously granted to employees resulted in the issuance of 36,391 shares of common stock, net of 10,012 shares that were withheld for tax obligations of the grantees, as allowed under the plan. During the second quarter of 2013, the Company granted to certain employees an aggregate of 459,032 restricted stock units and options to purchase an aggregate of 344,900 shares of its common stock with a grant date fair market value of $6.89 and $3.93 per share, respectively. In the third quarter of 2013, the Company granted to certain employees an aggregate of 34,840 restricted stock units, and options to purchase an aggregate of 113,237 shares of its common stock with an average grant date fair market value of $8.85 and $5.18 per share, respectively. The restricted stock units are subject to forfeiture unless certain performance objectives are achieved.

The aggregate fair value of restricted stock and restricted stock units vested during the nine months ended September 30, 2014 and 2013 was $0.7 million and $0.5 million, respectively. No restricted stock or restricted stock units vested during the three months ended September 30, 2014 or 2013.


15


The Company uses authorized but unissued shares of common stock for stock option exercises and restricted stock issuances pursuant to the Company’s share-based compensation plan and treasury stock for issuances outside of the plan. As of September 30, 2014, the total unrecognized compensation expense related to stock options and restricted stock awards was $1.6 million and $3.2 million, respectively.

9. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Defined benefit pension items
$
(20,686
)
 
$
(21,524
)
Less: deferred tax benefit
4,396

 
4,574

Net of tax
(16,290
)
 
(16,950
)
Interest rate swap
195

 
220

Less: deferred tax liability
(78
)
 
(88
)
Net of tax
117

 
132

Foreign currency translation adjustment
(626
)
 
1,206

Total accumulated other comprehensive loss
$
(16,799
)
 
$
(15,612
)


16


Changes in accumulated other comprehensive loss by component in the consolidated statements of comprehensive income (loss) include the following for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Defined
Benefit
Pension Items
 
Interest
Rate
Swap
 
Foreign
Currency
Translation Adjustment
 
Accumulated
Other
Comprehensive
Loss
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
Beginning balance, net
$
(17,284
)
 
$
17

 
$
2,873

 
$
(14,394
)
Other comprehensive income (loss) before reclassifications1
895

 
65

 
(3,499
)
 
(2,539
)
Amounts reclassified from accumulated other comprehensive loss2 3
99

 
35

 

 
134

Net other comprehensive income (loss)
994

 
100

 
(3,499
)
 
(2,405
)
Ending balance, net
$
(16,290
)
 
$
117

 
$
(626
)
 
$
(16,799
)
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
Beginning balance, net
$
(15,312
)
 
$
302

 
$
(1,304
)
 
$
(16,314
)
Other comprehensive income (loss) before reclassifications1
(961
)
 
(152
)
 
2,406

 
1,293

Amounts reclassified from accumulated other comprehensive loss2 3
236

 

 

 
236

Net other comprehensive income (loss)
(725
)
 
(152
)
 
2,406

 
1,529

Ending balance, net
$
(16,037
)
 
$
150

 
$
1,102

 
$
(14,785
)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
 
 
 
 
 
Beginning balance, net
$
(16,950
)
 
$
132

 
$
1,206

 
$
(15,612
)
Other comprehensive loss before reclassifications1
362

 
(74
)
 
(1,832
)
 
(1,544
)
Amounts reclassified from accumulated other comprehensive loss2 3
298

 
59

 

 
357

Net other comprehensive income (loss)
660

 
(15
)
 
(1,832
)
 
(1,187
)
Ending balance, net
$
(16,290
)
 
$
117

 
$
(626
)
 
$
(16,799
)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
 
 
 
 
 
Beginning balance, net
$
(16,853
)
 
$

 
$
2,239

 
$
(14,614
)
Other comprehensive income (loss) before reclassifications1
111

 
150

 
(1,137
)
 
(876
)
Amounts reclassified from accumulated other comprehensive loss2 3
705

 

 

 
705

Net other comprehensive income (loss)
816

 
150

 
(1,137
)
 
(171
)
Ending balance, net
$
(16,037
)
 
$
150

 
$
1,102

 
$
(14,785
)
____________________________
1
Net of tax expense (benefit) for the defined benefit pension plans of $0.2 million and $0.1 million for three and nine months ended September 30, 2014, respectively, and $(0.3) million for the three months ended September 30, 2013. Tax expense was insignificant for defined benefit pension plans for the nine months end September 30, 2013. Net of tax expense (benefit) for the interest rate swap, which was insignificant for the periods presented.

2
Net of tax expense for the defined benefit pension plans, which was insignificant for the three months ended September 30, 2014, $0.1 million for the nine months ended September 30, 2014 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2013, respectively. Net of tax expense for the interest rate swap, which was insignificant for the three and nine months ended September 30, 2014.

3
Reclassification adjustments out of accumulated other comprehensive loss for amortization of actuarial losses and prior service credits are included in the computation of net periodic pension cost. See Note 7 for additional details. Reclassification adjustments out of accumulated other comprehensive loss for the interest rate swap are included in interest expense. See Note 10 for additional details.

10. Derivative Instruments and Hedging Activities

The Company manages economic risk, including interest rate, liquidity and credit risks primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments. The Company does not enter into derivative instruments for speculative purposes.


17


On April 30, 2013, the Company entered into a forward-dated interest rate swap to hedge interest rate risk with respect to $39.3 million of borrowings under its Credit Agreement. The Company’s objective in using the interest rate derivative is to manage exposure to interest rate movements and add stability to interest expense. Upon inception, the interest rate swap was designated as a cash flow hedge and involves the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement without exchange of the underlying notional amount.

The following table summarizes the terms of the interest rate swap outstanding at September 30, 2014 (in thousands).
Type
Effective Date
 
Maturity Date
 
Fixed Rate
 
Floating Rate
 
Notional Amount
Interest rate swap
April 29, 2014
 
February 28, 2017
 
0.75
%
 
1 Month LIBOR
 
$
39,300


The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheets as of September 30, 2014 and December 31, 2013 (in thousands).
 
 
 
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
 
 
 
September 30, 2014
 
September 30, 2014
 
 
Classification
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Current
 
Prepaid expenses and other current assets
 
$

 
Accrued expenses and other current liabilities
 
$

Interest rate swap
 
Non-current
 
Intangible and other assets, net
 
195

 
Other liabilities
 

Total
 
 
 
 
 
$
195

 
 
 
$

 
 
 
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
 
 
 
December 31, 2013
 
December 31, 2013
 
 
Classification
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Current
 
Prepaid expenses and other current assets
 
$

 
Accrued expenses and other current liabilities
 
$

Interest rate swap
 
Non-current
 
Intangible and other assets, net
 
220

 
Other liabilities
 

Total
 
 
 
 
 
$
220

 
 
 
$


See Note 14 for additional information on the fair value of the Company’s interest rate swap.

The Company has concluded that the hedging relationship for the interest rate swap is highly effective. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings and included in interest income and other income (expense) on the consolidated statements of income.

Amounts reported in other comprehensive income (loss) related to derivatives are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. At September 30, 2014, the Company estimates that approximately $0.2 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next twelve months.


18


The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of comprehensive income (loss) (in thousands).
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Amount of income (loss) recognized in other comprehensive income (loss) for the interest rate swap, net of tax (effective portion)
$
65

 
$
(152
)
 
$
(74
)
 
$
150

Amount of loss reclassified from accumulated other comprehensive loss into interest expense for the interest rate swap, net of tax (effective portion)
(35
)
 

 
(59
)
 

Amount of loss reclassified from accumulated other comprehensive loss into interest income and other income (expense) for the interest rate swap, net of tax (ineffective portion)

 

 

 


Derivative financial agreements expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with major credit-worthy financial institutions.

11. Income Taxes

For the nine months ended September 30, 2014 and 2013, the Company recorded income tax expense of $4.7 million and $7.5 million, respectively. For the three months ended September 30, 2014 and 2013, the Company recorded income tax expense of $0.9 million and $1.5 million, respectively. For these periods, income tax expense reflects the Company’s estimated annual effective income tax rate considering the statutory rates in the countries in which the Company operates, adjusted for excludable items, and the effects of valuation allowance changes for certain foreign entities.

Income tax expense as a percentage of income before income taxes was 41.8% and 39.6% for the nine months ended September 30, 2014 and 2013, respectively, and 46.4% and 41.9% for the three months ended September 30, 2014 and 2013, respectively. The difference in income tax rates between periods is primarily attributable to changes in the mix of income (loss) before income taxes between countries whose income taxes are offset by a full valuation allowance and those that are not, and differing statutory tax rates in the countries in which the Company incurs tax liabilities.

Unrecognized Tax Benefits

A reconciliation of the change in the unrecognized tax benefits for the nine months ended September 30, 2014 is as follows (in thousands):
Balance at December 31, 2013
$
1,139

Additions based on tax positions of current year
147

Reductions for tax positions of prior years
(349
)
Reductions due to lapses of statutes of limitations

Balance at September 30, 2014
$
937


Unrecognized tax benefits at September 30, 2014 and December 31, 2013 of $0.9 million and $1.1 million, respectively, for uncertain tax positions, primarily 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.

The Company incurred no significant interest or penalties for the three or nine months ended September 30, 2014 or 2013 related to underpayments of income taxes or uncertain tax positions.


19


12. Commitments and Contingencies

The operations of the Company are subject to federal, state and local laws and regulations in the U.S. and various foreign jurisdictions relating to protection of the environment. Although the Company believes its operations are currently 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 accrual for environmental liabilities related to the remediation of site contamination for properties in the U.S. in the amount of $0.9 million as of both September 30, 2014 and December 31, 2013. While there is a reasonable possibility due to the inherent nature of environmental liabilities that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts would be material to its financial statements.

Furmanite America, a subsidiary of the Company, is involved in disputes with a customer, INEOS USA LLC, which claims that the subsidiary failed to provide it with satisfactory services at the customer’s facilities. On April 17, 2009, the customer initiated legal action against the subsidiary in the Common Pleas Court of Allen County, Ohio (the “Court”), alleging that the subsidiary and one of its former employees, who performed data services at one of the customer’s facilities, breached its contract with the customer and failed to provide the customer with adequate and timely information to support the subsidiary’s work at the customer’s facility. In March 2014, the customer’s claims against the former employee were dismissed and the Court granted partial summary judgment in favor of Furmanite America. The customer’s complaint seeks damages in an amount that the subsidiary believes represents the total proposed civil penalty, plus the cost of unspecified supplemental environmental projects requested by the regulatory agency to reduce air emissions at the customer’s facility, and also seeks unspecified punitive damages.

While the Company cannot make an assessment of the eventual outcome of all matters or determine the extent, if any, of any potential uninsured liability or damage, accruals of $1.9 million, which include the Furmanite America litigation, were recorded in accrued expenses and other current liabilities as of both September 30, 2014 and December 31, 2013. While there is a reasonable possibility that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts would be material to its financial statements.

The Company has other 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.

13. 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. Previously, for financial reporting purposes, the Company reported three segments based on the Company’s three geographical areas: the Americas, EMEA and Asia-Pacific. As a result of a business acquisition in 2013, the Company has determined that, for financial reporting purposes, it now operates in two segments that are based on its service and product offerings: 1) Technical Services and 2) Engineering & Project Solutions. Segment results for prior periods have been restated to conform to the current-period presentation.

Included in its Technical Services segment are the specialized technical services the Company provides to a global customer 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. Included in its Engineering & Project Solutions segment are professional engineering, construction management and plant asset management services. These services are provided to customers such as refining and petrochemical operators as well as maintenance, and engineering and construction contractors serving the downstream and midstream oil and gas markets, primarily in the Americas.

The Company evaluates performance based on the operating income (loss) from each segment, which excludes interest income and other income (expense), interest expense and income tax expense (benefit), which are not allocated to the segments. The accounting policies of the reportable segments are the same as those described in Note 1. Intersegment revenues are recorded at cost plus a profit margin. All transactions and balances between segments are eliminated in consolidation.


20


The following is a summary of the financial information of the Company’s reportable segments as of and for the three and nine months ended September 30, 2014 and 2013 reconciled to the amounts reported in the consolidated financial statements (in thousands):
 
Technical Services
 
Engineering & Project Solutions
 
Corporate
 
Reconciling
Items
 
Total
Three months ended September 30, 2014:
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
85,762

 
$
38,367

 
$

 
$

 
$
124,129

Intersegment revenues2

 
60

 

 
(60
)
 

 
 
 
 
 
 
 
 
 
 
Operating income (loss)3 4
$
7,832

 
$
135

 
$
(5,688
)
 
$

 
$
2,279

 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
84,915

 
$
14,608

 
$

 
$

 
$
99,523

Intersegment revenues2

 
2

 

 
(2
)
 

 
 
 
 
 
 
 
 
 
 
Operating income (loss)3 4
$
8,647

 
$
(229
)
 
$
(3,971
)
 
$

 
$
4,447

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
279,801

 
$
115,511

 
$

 
$

 
$
395,312

Intersegment revenues2

 
177

 

 
(177
)
 

Operating income (loss)3 4
$
29,781

 
$
(1,212
)
 
$
(15,468
)
 
$

 
$
13,101

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
272,622

 
$
24,315

 
$

 
$

 
$
296,937

Intersegment revenues2

 
2

 

 
(2
)
 

Operating income (loss)3 4
$
34,983

 
$
(195
)
 
$
(14,639
)
 
$

 
$
20,149

____________________________
1
Included in the Technical Services and Engineering & Project Solutions segments are total United States revenues of $86.6 million and $277.6 million for the three and nine months ended September 30, 2014, respectively, and $64.6 million and $196.2 million for the three and nine months ended September 30, 2013, respectively. Included in the Technical Services segment above are United Kingdom revenues of $16.2 million and $53.1 million for the three and nine months ended September 30, 2014, respectively, and $13.2 million and $40.1 million for the three and nine months ended September 30, 2013, respectively.
2
Reconciling items represent eliminations or reversals of transactions between reportable segments.
3
Corporate represents certain corporate overhead costs, including executive management, strategic planning, treasury, legal, human resources, information technology, accounting and risk management, which are not allocated to reportable segments. For both the three and nine months ended September 30, 2014, Corporate includes approximately $0.9 million in incremental compensation expenses pursuant to the provisions of a retirement agreement with a Company executive.
4
The Engineering & Project Solutions segment includes approximately $0.3 million and $0.5 million of direct costs associated with management transition and integration of the Furmanite Technical Solutions division for the three and nine months ended September 30, 2014, respectively, and approximately $0.1 million for both the three and nine months ended September 30, 2013.

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):
 
September 30,
2014
 
December 31,
2013
Total long-lived assets
 
 
 
United States
$
47,423

 
$
51,646

United Kingdom
5,179

 
5,172

All other
8,559

 
9,228

Total long-lived assets
$
61,161

 
$
66,046




21


14. Fair Value of Financial Instruments and Credit Risk

Fair value is defined under FASB ASC 820, Fair Value Measurement (“ASC 820”), 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 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.
Level 3 — Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The following table presents the Company’s fair value hierarchy for its financial instruments that required disclosure of their fair values on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
September 30, 2014
 
 
 
 
 
 
 
Interest rate swap asset
$
195

 
$

 
$
195

 
$

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Interest rate swap asset
$
220

 
$

 
$
220

 
$


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 interest rate swap asset is recorded at fair value on a recurring basis based on models using inputs, such as interest rate yield curves, LIBOR swap curves and OIS curves, observable for substantially the full term of the contract. See Note 10 for additional information on the Company’s interest rate swap. The estimated fair value of all debt as of September 30, 2014 and December 31, 2013 approximated the carrying value. These fair values were estimated based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.

There were no transfers between levels of the fair value hierarchy during the three or nine months ended September 30, 2014 or 2013.

The Company provides services to a domestic and international client base that includes petroleum refineries, chemical plants, offshore energy production platforms, steel mills, nuclear and conventional power stations, pulp and paper mills, food and beverage processing plants, other flow process facilities. The Company does not believe that it has a significant concentration of credit risk at September 30, 2014, as the Company’s accounts receivable are generated from these business industries with customers located throughout the Americas, EMEA and Asia-Pacific.

22



FURMANITE CORPORATION AND SUBSIDIARIES
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Business Overview

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

The Company conducts its principal business through a wholly owned subsidiary of the Parent Company, Furmanite Worldwide, Inc., and its domestic and international subsidiaries and affiliates under two operating segments: 1) Technical Services and 2) Engineering & Project Solutions. Technical Services provides specialized technical services, which include on-line, off-line and other services. Within these technical services, on-line services include leak sealing, hot tapping, line stopping, line isolation, composite repair, valve testing and certain non-destructive testing and inspection services, while off-line services include on-site machining, heat treatment, bolting, valve repair and other non-destructive testing and inspection services. Other services include smart shim services, concrete repair, engineering services, valves and other products and manufacturing. These services and products are provided primarily to electric power generating plants, the petroleum industry, which include refineries and offshore drilling rigs (including subsea), chemical plants and other process industries in the Americas (which includes operations in North America, South America and Latin America), EMEA (which includes operations in Europe, the Middle East and Africa) and Asia-Pacific. The Engineering & Project Solutions segment, which includes the Company’s Furmanite Technical Solutions (“FTS”) division, provides project planning, professional engineering, downstream non-destructive testing and inspection, construction management, mechanical integrity, field support, quality assurance and plant asset management services, as well as certain other inspection and project management services. These services are provided to refining and petrochemical operators as well as maintenance, and engineering and construction contractors serving the downstream and midstream oil and gas markets, substantially all of which are in the Americas.

Financial Overview

Consolidated revenues increased $24.6 million, or 24.7%, to $124.1 million for the three months ended September 30, 2014 and increased $98.4 million, or 33.1%, to $395.3 million for the nine months ended September 30, 2014, compared to the prior year periods. The higher revenues were attributable to a combination of increases from the Company’s Engineering & Project Solutions segment, which was formed following two acquisitions in the prior year, resulting in the creation of the FTS division in August 2013, as well as increases in off-line services in both the EMEA and Asia-Pacific regions of the Technical Services segment, including higher bolting, on-site machining, heat treatment and valve repair service revenues. These increases were partially offset by lower Technical Services revenues in the Americas, primarily within off-line services, reflecting customer delays and postponements experienced, including the impacts of severe winter weather earlier in 2014. The operating results for the three and nine months ended September 30, 2014 were impacted by higher selling, general and administrative costs, reflecting the effects of the acquisition, integration and transitional effects of the new Engineering & Project Solutions segment as well as additional personnel and related costs associated with the buildout of the Company’s strategic global organizational structure. These impacts were partially offset by the improved performance in the EMEA region of the Technical Services segment during the nine months ended September 30, 2014 and in the Asia-Pacific region during both the three and nine months ended September 30, 2014, reflecting the completion of certain large projects. The net effect of these factors resulted in operating income of $2.3 million and $13.1 million for the three and nine months ended September 30, 2014, respectively, compared to operating income of $4.4 million and $20.1 million for the three and nine months ended September 30, 2013, respectively.

Net income for the three and nine months ended September 30, 2014 was $1.1 million and $6.6 million, respectively, compared to $2.1 million and $11.4 million for the three and nine months ended September 30, 2013, respectively. The Company’s diluted earnings per share for the three and nine months ended September 30, 2014 were $0.03 and $0.17, respectively, compared to $0.06 and $0.30 for the three and nine months ended September 30, 2013, respectively.



23


Results of Operations
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share data)
Revenues
$
124,129

 
$
99,523

 
$
395,312

 
$
296,937

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
94,256

 
71,851

 
298,130

 
206,279

Depreciation and amortization expense
3,168

 
2,724

 
9,145

 
8,232

Selling, general and administrative expense
24,426

 
20,501

 
74,936

 
62,277

Total costs and expenses
121,850

 
95,076

 
382,211

 
276,788

Operating income
2,279

 
4,447

 
13,101

 
20,149

Interest income and other income (expense), net
172

 
(420
)
 
(432
)
 
(272
)
Interest expense
(468
)
 
(377
)
 
(1,362
)
 
(933
)
Income before income taxes
1,983

 
3,650

 
11,307

 
18,944

Income tax expense
(921
)
 
(1,530
)
 
(4,722
)
 
(7,499
)
Net income
$
1,062

 
$
2,120

 
$
6,585

 
$
11,445

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.06

 
$
0.18

 
$
0.31

Diluted
$
0.03

 
$
0.06

 
$
0.17

 
$
0.30

 
 
 
 
 
 
 
 
Additional Revenue Information:
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Technical Services:
 
 
 
 
 
 
 
On-line services
$
33,325

 
$
33,141

 
$
104,940

 
$
102,706

Off-line services
38,063

 
40,128

 
136,098

 
134,348

Other services
14,374

 
11,646

 
38,763

 
35,568

Total Technical Services
85,762

 
84,915

 
$
279,801

 
$
272,622

Engineering & Project Solutions
38,367

 
14,608

 
$
115,511

 
$
24,315

Total revenues
$
124,129

 
$
99,523

 
$
395,312

 
$
296,937

 
 
 
 
 
 
 
 
Additional Operating Income (Loss) Information:
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Technical Services:
 
 
 
 
 
 
 
Americas
$
3,694

 
$
5,427

 
$
15,190

 
$
26,052

EMEA
2,369

 
2,538

 
10,019

 
6,339

Asia-Pacific
1,769

 
682

 
4,572

 
2,592

Total Technical Services
7,832

 
8,647

 
29,781

 
34,983

Engineering & Project Solutions1
135

 
(229
)
 
(1,212
)
 
(195
)
Corporate2
(5,688
)
 
(3,971
)
 
(15,468
)
 
(14,639
)
Total operating income
$
2,279

 
$
4,447

 
$
13,101

 
$
20,149

____________________________
1
Includes approximately $0.3 million and $0.5 million of direct costs associated with management transition and integration of the Furmanite Technical Solutions division for the three and nine months ended September 30, 2014, respectively, and $0.1 million for both the three and nine months ended September 30, 2013.
2
Includes approximately $0.9 million of incremental compensation expenses pursuant to the provisions of a retirement agreement with a Company executive for the the three and nine months ended September 30, 2014.


24



Business Segment and Geographical Information
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
Technical Services
 
 
 
 
 
 
 
Americas
$
49,619

 
$
52,153

 
$
165,792

 
$
177,553

EMEA
24,258

 
24,984

 
81,701

 
69,983

Asia-Pacific
11,885

 
7,778

 
32,308

 
25,086

Total Technical Services
85,762

 
84,915

 
279,801

 
272,622

Engineering & Project Solutions1
38,367

 
14,608

 
115,511

 
24,315

Total revenues
124,129

 
99,523

 
395,312

 
296,937

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
 
 
 
 
 
 
 
Technical Services
 
 
 
 
 
 
 
Americas
34,250

 
35,387

 
112,342

 
118,037

EMEA
17,048

 
17,354

 
56,566

 
48,517

Asia-Pacific
8,119

 
5,322

 
22,425

 
16,886

Total Technical Services
59,417

 
58,063

 
191,333

 
183,440

Technical Services operating costs as percentage of its revenue
69.3
%
 
68.4
%
 
68.4
%
 
67.3
%
Engineering & Project Solutions1
34,839

 
13,788

 
106,797

 
22,839

Total operating costs (exclusive of depreciation and amortization)
94,256

 
71,851

 
298,130

 
206,279

Operating costs as a percentage of revenue
75.9
%
 
72.2
%
 
75.4
%
 
69.5
%