FURMANITE CORP - FORM 10-Q - August 6, 2015

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EX-32.1 - EXHIBIT 32.1 - FURMANITE CORPfrm-ex321x20150630xq2.htm
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EX-10.2 - EXHIBIT 10.2 - FURMANITE CORPfrm-ex102x20150630xq2.htm
EX-31.2 - EXHIBIT 31.2 - FURMANITE CORPfrm-ex312x20150630xq2.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 June 30, 2015
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 37,879,604 shares of the registrant’s common stock outstanding as of August 3, 2015.
 



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 this Report and in our Annual Report on Form 10-K for the year ended December 31, 2014. 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) 
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
39,169

 
$
33,753

Accounts receivable, trade (net of allowance for doubtful accounts of $947 and $1,036 as of June 30, 2015 and December 31, 2014, respectively)
121,118

 
110,219

Inventories, net:
 
 
 
Raw materials and supplies
26,540

 
25,626

Work-in-process
15,233

 
11,538

Finished goods
67

 
219

Deferred tax assets, current
7,371

 
7,324

Prepaid expenses and other current assets
8,930

 
14,011

Total current assets
218,428

 
202,690

Property and equipment
114,591

 
112,716

Less: accumulated depreciation and amortization
(64,314
)
 
(60,786
)
Property and equipment, net
50,277

 
51,930

Goodwill
15,897

 
15,897

Deferred tax assets, non-current
3,279

 
3,664

Intangible and other assets, net
9,006

 
9,990

Total assets
$
296,887

 
$
284,171

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
93

 
$
2,442

Accounts payable
20,235

 
18,873

Accrued expenses and other current liabilities
37,895

 
33,609

Income taxes payable
552

 
1,143

Total current liabilities
58,775

 
56,067

Long-term debt, non-current
68,891

 
61,853

Net pension liability
15,545

 
17,115

Other liabilities
6,773

 
6,672

Commitments and contingencies (Note 11)


 


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

 
—

Common stock, no par value; 60,000,000 shares authorized; 41,888,567 and 41,749,196 shares issued as of June 30, 2015 and December 31, 2014, respectively
4,850

 
4,834

Additional paid-in capital
140,419

 
139,312

Retained earnings
41,472

 
37,784

Accumulated other comprehensive loss
(21,825
)
 
(21,453
)
Treasury stock, at cost (4,008,963 shares)
(18,013
)
 
(18,013
)
Total stockholders’ equity
146,903

 
142,464

Total liabilities and stockholders’ equity
$
296,887

 
$
284,171

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
129,629

 
$
146,242

 
$
251,967

 
$
271,183

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
95,741

 
109,172

 
189,611

 
203,874

Depreciation and amortization expense
3,169

 
2,988

 
6,251

 
5,977

Selling, general and administrative expense
24,396

 
25,778

 
47,452

 
50,510

Total costs and expenses
123,306

 
137,938

 
243,314

 
260,361

Operating income
6,323

 
8,304

 
8,653

 
10,822

Interest income and other income (expense), net
(555
)
 
(439
)
 
(1,078
)
 
(604
)
Interest expense
(356
)
 
(445
)
 
(988
)
 
(894
)
Income before income taxes
5,412

 
7,420

 
6,587

 
9,324

Income tax expense
(2,037
)
 
(2,913
)
 
(2,899
)
 
(3,801
)
Net income
$
3,375

 
$
4,507

 
$
3,688

 
$
5,523

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.12

 
$
0.10

 
$
0.15

Diluted
$
0.09

 
$
0.12

 
$
0.10

 
$
0.15

Weighted-average number of common and common equivalent shares used in computing earnings per common share:
 
 
 
 
 
 
 
Basic
37,836

 
37,617

 
37,793

 
37,593

Diluted
38,030

 
37,836

 
37,982

 
37,832

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


5

FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
3,375

 
$
4,507

 
$
3,688

 
$
5,523

Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
Net gain (loss) arising during period
(760
)
 
(406
)
 
470

 
(425
)
Cash flow hedges:
 
 
 
 
 
 
 
Gain (loss) on interest rate swap
245

 
(197
)
 
(495
)
 
(232
)
Less: Reclassification of realized loss on interest rate swap included in interest expense
—

 
40

 
34

 
40

Cash flow hedges, net
245

 
(157
)
 
(461
)
 
(192
)
Foreign currency translation adjustments
2,425

 
1,047

 
(433
)
 
1,667

Total other comprehensive income (loss) before tax
1,910

 
484

 
(424
)
 
1,050

Income tax benefit related to components of other comprehensive income (loss)
23

 
150

 
52

 
168

Other comprehensive income (loss), net of tax
1,933

 
634

 
(372
)
 
1,218

Comprehensive income
$
5,308

 
$
5,141

 
$
3,316

 
$
6,741

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


6

FURMANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2015 (Unaudited) and Year Ended December 31, 2014
(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, 2014
41,557,238

 
4,008,963

 
$
4,811

 
$
135,881

 
$
26,429

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

Net income
—

 
—

 
—

 
—

 
11,355

 
—

 
—

 
11,355

Stock-based compensation, stock option exercises and vesting of restricted stock
191,958

 
—

 
23

 
2,442

 
—

 
—

 
—

 
2,465

Excess tax benefits from stock-based compensation
—

 
—

 
—

 
989

 
—

 
—

 
—

 
989

Change in pension net actuarial loss, net of tax
—

 
—

 
—

 
—

 
—

 
(707
)
 
—

 
(707
)
Unrealized loss on interest rate swap, net of tax
—

 
—

 
—

 
—

 
—

 
(75
)
 
—

 
(75
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
—

 
(5,059
)
 
—

 
(5,059
)
Balances at December 31, 2014
41,749,196

 
4,008,963

 
$
4,834

 
$
139,312

 
$
37,784

 
$
(21,453
)
 
$
(18,013
)
 
$
142,464

Net income
—

 
—

 
—

 
—

 
3,688

 
—

 
—

 
3,688

Stock-based compensation, stock option exercises and vesting of restricted stock
139,371

 
—

 
16

 
1,089

 
—

 
—

 
—

 
1,105

Proceeds from disgorgement of former officer short swing profits
—

 
—

 
—

 
18

 
—

 
—

 
—

 
18

Change in pension net actuarial loss, net of tax
—

 
—

 
—

 
—

 
—

 
338

 
—

 
338

Unrealized loss on interest rate swap, net of tax
—

 
—

 
—

 
—

 
—

 
(277
)
 
—

 
(277
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
—

 
(433
)
 
—

 
(433
)
Balances at June 30, 2015
41,888,567

 
4,008,963

 
$
4,850

 
$
140,419

 
$
41,472

 
$
(21,825
)
 
$
(18,013
)
 
$
146,903

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)
 
 
Six Months Ended 
 June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
3,688

 
$
5,523

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,251

 
5,977

Provision for doubtful accounts
268

 
3

Stock-based compensation expense
1,226

 
886

Deferred income taxes
99

 
69

Other, net
(828
)
 
(733
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(11,070
)
 
(9,541
)
Inventories
(4,301
)
 
(2,177
)
Prepaid expenses and other current assets
3,036

 
2,508

Accounts payable
1,429

 
2,518

Accrued expenses and other current liabilities
6,066

 
4,108

Income taxes payable
(764
)
 
(451
)
Other, net
35

 
136

Net cash provided by operating activities
5,135

 
8,826

Investing activities:
 
 
 
Capital expenditures
(4,015
)
 
(3,477
)
Proceeds from sale of assets
113

 
3

Net cash used in investing activities
(3,902
)
 
(3,474
)
Financing activities:
 
 
 
Proceeds from issuance of debt
44,600

 
—

Payments on debt
(39,054
)
 
(912
)
Debt issuance costs
(571
)
 
—

Issuance of common stock
46

 
32

Proceeds from disgorgement of former officer short swing profits
18

 
—

Other
(333
)
 
(214
)
Net cash provided by (used in) financing activities
4,706

 
(1,094
)
Effect of exchange rate changes on cash
(523
)
 
279

Increase in cash and cash equivalents
5,416

 
4,537

Cash and cash equivalents at beginning of period
33,753

 
33,240

Cash and cash equivalents at end of period
$
39,169

 
$
37,777

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
959

 
$
693

Cash paid for income taxes, net of refunds received
$
3,080

 
$
3,465

Non-cash investing and financing activities:
 
 
 
Settlement of business acquisition final working capital receivable
$
2,474

 
$
—

Settlement of acquisition-related notes payable
$
(857
)
 
$
—

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

8

FURMANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(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, 2014 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 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 and are generally billed on a time and materials basis when the work is completed. Revenue is typically recognized when services are rendered or when product is shipped to the job site and risk of ownership passes to the customer. Infrequently, the Company enters into contracts that are longer in duration that represent multiple element arrangements, which include a combination of services and products. For these contracts, revenues are allocated to the separate deliverables on the basis of stand-alone selling prices and recognized when the services have been rendered or the products delivered 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 six months ended June 30, 2015 or 2014.

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 and equipment rental, 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 and professional fees, 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 FASB issued Accounting Standards Update (“ASU”) 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. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. However, in July 2015, the FASB voted to defer the effective date by one year to be effective for annual reporting periods beginning after December 15, 2017. The ASU does not provide an option for early adoption, but under the FASB’s decision, entities would be permitted to early adopt the new guidance using the original effective date in ASU No. 2014-09. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Companies have an option of using either a full retrospective or modified retrospective adoption approach. The updated guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Transitioning to the new guidance requires retrospective application. The Company plans to

10

make the required change to the presentation of its debt issuance costs in the first quarter of fiscal year 2016, but it does not believe such change will have a material impact to its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) – Simplifying the Measurement of Inventory. The amendments in the ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value to more closely align the measurement of inventory in U.S. GAAP with International Financial Reporting Standards. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. ASU 2015-11 is effective on a prospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with earlier application permitted. The Company does not believe the adoption of ASU 2015-11 will have a material impact on its consolidated financial statements.

2. Acquisition

On April 21, 2015, Furmanite America, Inc., a wholly owned subsidiary of the Company, entered into a settlement agreement with ENGlobal Corporation (“ENGlobal”) (the “Agreement”) to resolve the determination of the final working capital adjustment associated with the Company’s August 2013 acquisition of ENGlobal’s Engineering & Construction segment. Additionally, the Agreement resolves certain other claims and disputes of the parties associated with this acquisition as well as a smaller acquisition the Company completed in January 2013. Under the terms of the Agreement, the Company made cash payments to ENGlobal of $3.6 million in April 2015, reflecting the settlement of the $4.4 million remaining principal amount on two acquisition-related notes payable, partially offset by $0.8 million of net credits related to accrued interest and the final settlement of reimbursable items and working capital balances. The Company realized a gain of $0.1 million in connection with the Agreement.

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, including 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. Any dividends paid on restricted shares are non-forfeitable in the event the award does not vest. 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
3,375

 
$
4,507

 
$
3,688

 
$
5,523

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
37,836

 
37,617

 
37,793

 
37,593

Dilutive effect of common stock equivalents
194

 
219

 
189

 
239

Diluted weighted-average common shares outstanding
38,030

 
37,836

 
37,982

 
37,832

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.12

 
$
0.10

 
$
0.15

Dilutive
$
0.09

 
$
0.12

 
$
0.10

 
$
0.15

Stock options and restricted stock units excluded from diluted weighted-average common shares outstanding because their inclusion would have an anti-dilutive effect:
432

 
463

 
543

 
287



11

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Compensation and benefits
$
27,612

 
$
23,073

Professional, audit and legal fees
2,066

 
1,050

Estimated potential uninsured liability claims
1,934

 
1,934

Value added tax payable
1,734

 
1,668

Taxes other than income
1,553

 
1,674

Customer deposits
733

 
651

Other employee related expenses
638

 
630

Leases
194

 
1,070

Interest
118

 
368

Other
1,313

 
1,491

Total accrued expenses and other current liabilities
$
37,895

 
$
33,609



5. Long-Term Debt

Long-term debt consists of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Borrowings under the revolving credit facility (the “Credit Agreement”)
$
68,891

 
$
59,300

Capital leases
2

 
8

Notes payable
—

 
4,896

Other debt
91

 
91

Total long-term debt
68,984

 
64,295

Less: current portion of long-term debt
(93
)
 
(2,442
)
Total long-term debt, non-current
$
68,891

 
$
61,853


Credit Facilities

On March 13, 2015, 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 second amendment (the “Second Amendment”) to the credit agreement dated March 5, 2012 with a syndicate of banks (collectively, the “Lenders”) previously led by JP Morgan Chase Bank, N.A. as Administrative Agent (the “Credit Agreement”). Under the Second Amendment, Wells Fargo Bank, N.A. is the successor Administrative Agent, replacing JP Morgan Chase Bank, N.A. The Second Amendment includes several modifications, including increasing the revolving credit facility capacity to $150.0 million from $100.0 million, extending the maturity date to March 13, 2020 from February 28, 2017, reducing the ranges for the commitment fee and margin that is added to the applicable variable interest rate and the easing of certain covenants and restrictive terms. The Second Amendment also reflects changes in the composition of the Lenders and their respective commitment amounts. The portion of the amount available for swing line loans to FWI is $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 June 30, 2015 and December 31, 2014, $68.9 million and $59.3 million, respectively, 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 1.4% at June 30, 2015. 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 in the Credit Agreement. On March 16, 2015, 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 1.99% plus the margin and Leverage Ratio adjustment, as described above, beginning March 13, 2016 through March 13, 2020 on $40.0 million of the outstanding amount under the Credit Agreement. This

12

interest rate swap replaces the previous swap, which was terminated in March 2015 in conjunction with the Second Amendment to the Credit Agreement. See Note 9 for further information regarding the interest rate swaps. The Credit Agreement contains a commitment fee, which ranges from 0.15% to 0.30% based on the Leverage Ratio (0.20% at June 30, 2015), and is based on the unused portion of the amount available under the Credit Agreement. All obligations under the Credit Agreement are guaranteed by FWI and certain of its subsidiaries under a guaranty and collateral agreement, and are secured by a first priority lien on FWI and certain of its subsidiaries’ assets (which approximated $220.5 million as of June 30, 2015). 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 3.00 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 minus cash taxes minus Restricted Payments made in cash (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)) / interest expense plus scheduled payments of debt, 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, however certain restrictions are only applicable in instances where the Leverage Ratio is greater than or equal to 2.00 to 1.00. 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, 2015, FWI was in compliance with all covenants under the Credit Agreement.

Considering the outstanding borrowings of $68.9 million, and $7.7 million related to outstanding letters of credit, the unused borrowing capacity under the Credit Agreement was $73.4 million at June 30, 2015.

Notes Payable and Other Debt

On January 1, 2013, in connection with an asset purchase from ENGlobal, the Company issued a $1.9 million promissory note, which bore interest at 5.0% per annum. 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 bore interest at 4.0% per annum. These notes were originally due in four equal annual installments; however, in accordance with the settlement agreement with ENGlobal discussed in Note 2, the Company settled the remaining principal balance on both notes, which totaled $4.4 million on the date of the settlement in 2015.

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.

6. 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 approximately 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.

Net periodic pension cost for the U.K. and Norwegian Plans includes the following components (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
3

 
$
79

 
$
84

 
$
157

Interest cost
803

 
1,037

 
1,627

 
2,057

Expected return on plan assets
(892
)
 
(1,115
)
 
(1,801
)
 
(2,213
)
Amortization of net actuarial loss
128

 
127

 
256

 
252

Net curtailment/settlement gain
(332
)
 
—

 
(332
)
 
—

Net periodic pension cost (credit)
$
(290
)
 
$
128

 
$
(166
)
 
$
253


13


The expected long-term rate of return on invested assets is determined based on the weighted average of expected returns on asset investment categories as follows: 5.0% overall, 6.4% for equities and 2.4% for bonds. The Company expects to contribute $1.7 million to the pension plan for 2015, of which $0.8 million has been contributed through June 30, 2015.

7. 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 six months ended June 30, 2015, the total compensation cost charged against income and included in selling, general and administrative expenses for stock-based compensation arrangements was $0.7 million and $1.2 million, respectively, and $0.6 million and $0.9 million for the three and six months ended June 30, 2014, respectively. Compensation cost for the three and six months ended June 30, 2015 includes $0.2 million associated with the accelerated vesting of awards in connection with the retirement of one of the Company’s directors.

During the first quarter of 2015, the Company did not grant any shares of restricted stock awards to its outside directors, but 30,000 shares of restricted stock awards granted previously to the outside directors vested. Additionally, the vesting of 32,918 restricted stock units previously granted to employees resulted in the issuance of 24,839 shares of common stock, net of 8,079 shares that were withheld for tax obligations of the grantees, as allowed under the plan. During the second quarter of 2015, the Company granted 70,000 shares of restricted stock awards to its outside directors at a grant date fair value of $8.48 per share and 28,000 shares of restricted stock awards granted previously vested, which were associated with the accelerated vesting of awards in connection with the retirement of one of the Company’s directors. Additionally, the vesting of 38,053 shares of restricted stock units previously granted to employees resulted in the issuance of 29,699 shares of common stock, net of 8,354 shares that were withheld for tax obligations of the grantees, as allowed under the plan. Also, the Company granted options to purchase 17,500 shares to an employee with a grant date fair value of $4.64 per share.

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.

The aggregate fair value of restricted stock and restricted stock units vested during the six months ended June 30, 2015 and 2014 was $1.0 million and $0.7 million, respectively, and was $0.6 million for the three months ended June 30, 2015. No restricted stock or restricted stock units vested during the three months ended June 30, 2014.

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 June 30, 2015, the total unrecognized compensation expense related to stock options and restricted stock/unit awards was $1.8 million and $2.3 million, respectively.

8. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Defined benefit pension items
$
(21,710
)
 
$
(22,180
)
Less: deferred tax benefit
4,391

 
4,523

Net of tax
(17,319
)
 
(17,657
)
Interest rate swap
(366
)
 
95

Less: deferred tax benefit (liability)
146

 
(38
)
Net of tax
(220
)
 
57

Foreign currency translation adjustment
(4,286
)
 
(3,853
)
Total accumulated other comprehensive loss
$
(21,825
)
 
$
(21,453
)

14


Changes in accumulated other comprehensive loss by component in the consolidated statements of comprehensive income (loss) include the following for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Defined
Benefit
Pension Items
 
Interest
Rate
Swap
 
Foreign
Currency
Translation Adjustment
 
Accumulated
Other
Comprehensive
Loss
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
Beginning balance, net
$
(16,680
)
 
$
(367
)
 
$
(6,711
)
 
$
(23,758
)
Other comprehensive income (loss) before reclassifications1
(983
)
 
147

 
2,425

 
1,589

Amounts reclassified from accumulated other comprehensive loss2 3
344

 
—

 
—

 
344

Net other comprehensive income (loss)
(639
)
 
147

 
2,425

 
1,933

Ending balance, net
$
(17,319
)
 
$
(220
)
 
$
(4,286
)
 
$
(21,825
)
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
Beginning balance, net
$
(16,965
)
 
$
111

 
$
1,826

 
$
(15,028
)
Other comprehensive income (loss) before reclassifications1
(419
)
 
(118
)
 
1,047

 
510

Amounts reclassified from accumulated other comprehensive loss2 3
100

 
24

 
—

 
124

Net other comprehensive income (loss)
(319
)
 
(94
)
 
1,047

 
634

Ending balance, net
$
(17,284
)
 
$
17

 
$
2,873

 
$
(14,394
)
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
 
 
 
 
Beginning balance, net
$
(17,657
)
 
$
57

 
$
(3,853
)
 
$
(21,453
)
Other comprehensive income (loss) before reclassifications1
(105
)
 
(297
)
 
(433
)
 
(835
)
Amounts reclassified from accumulated other comprehensive loss2 3
443

 
20

 
—

 
463

Net other comprehensive income (loss)
338

 
(277
)
 
(433
)
 
(372
)
Ending balance, net
$
(17,319
)
 
$
(220
)
 
$
(4,286
)
 
$
(21,825
)
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
 
 
 
 
 
Beginning balance, net
$
(16,950
)
 
$
132

 
$
1,206

 
$
(15,612
)
Other comprehensive income (loss) before reclassifications1
(533
)
 
(139
)
 
1,667

 
995

Amounts reclassified from accumulated other comprehensive loss2 3
199

 
24

 
—

 
223

Net other comprehensive income (loss)
(334
)
 
(115
)
 
1,667

 
1,218

Ending balance, net
$
(17,284
)
 
$
17

 
$
2,873

 
$
(14,394
)
____________________________
1
Net of tax benefit for the defined benefit pension plans of $(0.2) million for the three months ended June 30, 2015 and an insignificant amount for the six months ended June 30, 2015. Net of tax expense (benefit) for the interest rate swap of $0.1 million and ($0.2) million for the three and six months ended June 30, 2015, respectively. Net of tax benefit for both the defined benefit pension plans and interest rate swap of $(0.1) million for each of the three and six months ended June 30, 2014.

2
Net of tax expense for the defined benefit pension plans, which was $0.1 million for each of the three and six months ended June 30, 2015 and was $0.1 million for the six months ended June 30, 2014. Net of tax expense for the defined benefit pension plans, which was insignificant for three months ended June 30, 2014. Net of tax expense for the interest swap, which was insignificant for each of the three and six months ended June 30, 2015 and 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 6 for additional details. Reclassification adjustments out of accumulated other comprehensive loss for the interest rate swap are included in interest expense. See Note 9 for additional details.

9. 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.


15

On March 16, 2015, the Company entered into a forward-dated interest rate swap to hedge interest rate risk with respect to $40.0 million of borrowings under its Credit Agreement, replacing the previous interest rate swap, which was terminated on March 13, 2015 in conjunction with the Second Amendment to its Credit Agreement and resulted in an insignificant gain. The Company’s objective in using interest rate derivatives is to manage exposure to interest rate movements and add stability to interest expense. Upon inception, the interest rate swaps were designated as cash flow hedges and involve 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 June 30, 2015 (in thousands):
Type
Effective Date
 
Maturity Date
 
Fixed Rate
 
Floating Rate
 
Notional Amount
Interest rate swap
March 13, 2016
 
March 13, 2020
 
1.99
%
 
1 Month LIBOR
 
$
40,000


The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2015 and December 31, 2014 (in thousands):
 
 
 
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
 
 
 
June 30, 2015
 
June 30, 2015
 
 
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
 
—

 
Other liabilities
 
366

Total
 
 
 
 
 
$
—

 
 
 
$
366

 
 
 
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
 
 
 
December 31, 2014
 
December 31, 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
 
95

 
Other liabilities
 
—

Total
 
 
 
 
 
$
95

 
 
 
$
—


See Note 13 for additional information on the fair value of the Company’s interest rate swaps.

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 June 30, 2015, the Company estimates that approximately $0.1 million will be reclassified from accumulated other comprehensive loss as an increase in interest expense over the next twelve months.


16

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of comprehensive income (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Amount of income (loss) recognized in other comprehensive income (loss) for the interest rate swap, net of tax (effective portion)
$
147

 
$
(118
)
 
$
(297
)
 
$
(139
)
Amount of loss reclassified from accumulated other comprehensive loss into interest expense for the interest rate swap, net of tax (effective portion)
—

 
(24
)
 
(20
)
 
(24
)
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.

10. Income Taxes

For the six months ended June 30, 2015 and 2014, the Company recorded income tax expense of $2.9 million and $3.8 million, respectively. For the three months ended June 30, 2015 and 2014, the Company recorded income tax expense of $2.0 million and $2.9 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 44.0% and 40.8% for the six months ended June 30, 2015 and 2014, respectively, and 37.6% and 39.3% for the three months ended June 30, 2015 and 2014, 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 six months ended June 30, 2015 is as follows (in thousands):
Balance at December 31, 2014
$
779

Additions based on tax positions of current year
89

Balance at June 30, 2015
$
868


Unrecognized tax benefits at June 30, 2015 and December 31, 2014 of $0.9 million and $0.8 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 six months ended June 30, 2015 or 2014 related to underpayments of income taxes or uncertain tax positions.

11. Commitments and Contingencies

The operations of the Company are subject to federal, state and local laws and regulations in the U.S. and various foreign 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 $0.8 million as of both June 30, 2015

17

and December 31, 2014. 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, Inc., 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, Inc. That decision is currently under appellate review. 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.

On February 27, 2015, Norfolk County Retirement System (the “Plaintiff”) filed a putative stockholder class and derivative action (the “Action”) in the Court of Chancery of the State of Delaware (the “Delaware Court”) against the then-members of the Company’s Board of Directors (the “Board”) (Sangwoo Ahn, Kathleen Cochran, Kevin Jost, Joseph Milliron and Ralph Patitucci, collectively “the Defendants”). The Plaintiff alleged that the so-called “dead hand” provision of the Company’s stockholder rights plan (the “Rights Plan”), which provided that the Rights Plan could only be redeemed by Company directors serving at the date of the adoption of the Rights Plan, or by certain directors approved by the Board, was unenforceable, and that the Defendants had breached their fiduciary duties by failing to eliminate that provision. The Plaintiff also alleged that the Defendants had breached their fiduciary duties by failing to approve four Board nominees proposed by Mustang Capital Management, LLC for the purposes of the Rights Plan. On March 4, 2015, the Company’s Board amended the Rights Plan so that it expired on March 6, 2015. On March 10, 2015, the Plaintiff notified the Delaware Court that its claims had been mooted and that it anticipated that it would shortly dismiss the Action without prejudice. The Plaintiff also informed the Delaware Court that it anticipated that it would seek an award of attorneys’ fees in connection with the repeal of the Rights Plan. On March 19, 2015, the Delaware Court dismissed the Action, but retained jurisdiction solely for the purposes of determining Plaintiff’s counsel’s application for attorneys’ fees and expenses. On June 5, 2015, the parties entered into an agreement under which the Company would pay Plaintiff’s counsel $0.3 million in attorneys’ fees and expenses, and the parties requested that the Delaware Court close the Action. On July 6, 2015, the Delaware Court issued an order closing the Action, subject to the Company filing an affidavit with the Delaware Court that it had attached the Delaware Court’s order as an exhibit to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, in order to provide the required notice for purposes of the rules of the Delaware Court. A copy of the Delaware Court’s order closing the Action is attached to this Form 10-Q as Exhibit 10.2.

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 June 30, 2015 and December 31, 2014. 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.

12. Business Segment Data and Geographical Information

An operating segment is defined as a component of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates in two segments that are based on its service and product offerings: 1) Technical Services and 2) Engineering & Project Solutions.

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.


18

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.

The following is a summary of the financial information of the Company’s reportable segments as of and for the six months ended June 30, 2015 and 2014 reconciled to the amounts reported in the consolidated financial statements (in thousands):
 
Technical Services
 
Engineering & Project Solutions
 
Corporate
 
Reconciling
Items
 
Total
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
91,415

 
$
38,214

 
$
—

 
$
—

 
$
129,629

Intersegment revenues2
—

 
57

 
—

 
(57
)
 
—

Operating income (loss)3
$
13,259

 
$
516

 
$
(7,452
)
 
$
—

 
$
6,323

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
106,289

 
$
39,953

 
$
—

 
$
—

 
$
146,242

Intersegment revenues2
—

 
46

 
—

 
(46
)
 
—

Operating income (loss)3 4
$
14,284

 
$
(590
)
 
$
(5,390
)
 
$
—

 
$
8,304

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
177,379

 
$
74,588

 
$
—

 
$
—

 
$
251,967

Intersegment revenues2
—

 
146

 
—

 
(146
)
 
—

Operating income (loss)3
$
21,989

 
$
520

 
$
(13,856
)
 
$
—

 
$
8,653

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
194,039

 
$
77,144

 
$
—

 
$
—

 
$
271,183

Intersegment revenues2
—

 
117

 
—

 
(117
)
 
—

Operating income (loss)3 4
$
21,949

 
$
(1,347
)
 
$
(9,780
)
 
$
—

 
$
10,822

____________________________
1
Included in the Technical Services and Engineering & Project Solutions segments are total United States revenues of $94.1 million and $183.9 million for the three and six months ended June 30, 2015, respectively, and $102.3 million and $191.0 million for the three and six months ended June 30, 2014, respectively. Total foreign revenues for the three and six months ended June 30, 2015 totaled $35.5 million and $68.1 million, respectively, and $43.9 million and $80.2 million for the three and six months ended June 30, 2014, respectively. Included in the Technical Services segment above are United Kingdom revenues of $15.7 million million and $30.0 million for the three and six months ended June 30, 2015, respectively, and $19.2 million and $36.9 million for the three and six months ended June 30, 2014, respectively. Revenues attributable to individual countries are based on the country of domicile of the legal entity that performs the work.
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 the three and six months ended June 30, 2015, Corporate includes approximately $1.7 million and $2.2 million, respectively, of incremental, non-routine professional fees and other costs.
4
The Engineering & Project Solutions segment includes nil and approximately $0.2 million of direct costs associated with the integration of the Furmanite Technical Solutions division for the three and six months ended June 30, 2014. 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,
2015
 
December 31,
2014
Total long-lived assets
 
 
 
United States
$
45,011

 
$
46,958

United Kingdom
4,810

 
5,005

All other
6,881

 
7,376

Total long-lived assets
$
56,702

 
$
59,339


13. 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

19

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 June 30, 2015 and December 31, 2014 (in thousands):
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
June 30, 2015
 
 
 
 
 
 
 
Interest rate swap asset
$
—

 
$
—

 
$
—

 
$
—

Interest rate swap liability
$
366

 
$
—

 
$
366

 
$
—

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Interest rate swap asset
$
95

 
$
—

 
$
95

 
$
—

Interest rate swap liability
$
—

 
$
—

 
$
—

 
$
—


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 9 for additional information on the Company’s interest rate swap. The estimated fair value of all debt as of June 30, 2015 and December 31, 2014 approximated the carrying value. These fair values, which are Level 3 measurements, 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 six months ended June 30, 2015 or 2014.

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 June 30, 2015, as the Company’s accounts receivable are generated from these business industries with customers located throughout the Americas, EMEA and Asia-Pacific.

14. Related Party Transactions

In April 2015, the Company was notified by its former Chief Executive Officer that, as a result of certain purchases and sales of shares of the Company’s common stock made by the former Chief Executive Officer within a period of less than six months, the former Chief Executive Officer had realized short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. In April 2015, the former Chief Executive Officer made a payment of $18,431.76 to the Company in disgorgement of these short-swing profits.

In an agreement dated May 6, 2015 between the Company and Mustang Capital Management, LLC (“Mustang”) (the “Settlement Agreement”) in conjunction with the appointment of three new directors, including John K. H. Linnartz, the Managing Member of Mustang, to the Company’s Board of Directors, it was agreed that the Company would reimburse Mustang for its documented out-of-pocket fees and expenses (including legal expenses) incurred in connection with the matters related to the 2015 Annual Meeting and the negotiation and execution of the Settlement Agreement, up to $575,000, which was the amount of the reimbursement paid by the Company to Mustang during the second quarter of 2015.


20


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.

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 SmartShimTM 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 includes refineries and offshore drilling rigs (including subsea), chemical plants and other process industries in the Americas (which includes operations in North America, South America and Latin America), EMEA (which includes operations in Europe, the Middle East and Africa) and Asia-Pacific through a wholly owned subsidiary of the Parent Company, Furmanite Worldwide, Inc. (“FWI”), and its domestic and international subsidiaries and affiliates.

Engineering & Project Solutions 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 decreased $16.6 million, or 11.4%, to $129.6 million for the three months ended June 30, 2015 and decreased $19.2 million, or 7.1% to $252.0 million for the six months ended June 30, 2015, compared to the prior year periods. The decreases in consolidated revenues were largely attributable to unfavorable foreign exchange rate changes, which impacted revenues by $6.0 million and $10.3 million for the three and six months ended June 30, 2015, respectively, compared to the prior year periods. These foreign exchange rate impacts were primarily associated with changes in the exchange rates for the the Australian dollar, the British Pound, the Euro and the Norwegian krone relative to the U.S. dollar in the EMEA and Asia-Pacific regions. Excluding the foreign currency impact, higher revenues in the Asia-Pacific region were more than offset by lower revenues in the Americas and EMEA regions of the Technical Services segment. The decreases in revenues in the Americas primarily reflected reductions in off-line services, primarily lower valve repair and on-site machining service revenues, while the decreases in EMEA reflect certain large, high-margin projects completed during the prior-year periods that did not recur in the current year. Consolidated revenues, to a lesser extent, were also affected by decreased revenues in the Engineering & Project Solutions segment.

Operating results for the three and six months ended June 30, 2015 were unfavorably impacted by foreign exchange rate changes as well as lower activity within the EMEA region and increased Corporate-related professional fees and other costs associated with the Company’s 2015 Annual Meeting of Stockholders. These factors were partially offset by improved performance in the Asia-Pacific region for the six months ended June 30, 2015, and certain reductions in selling, general and administrative expenses, reflecting conscious cost containment measures, principally within the Engineering & Project Solutions segment during both the three and six months ended June 30, 2015. The net effect of these factors resulted in operating income of $6.3 million and $8.7 million for the three and six months ended June 30, 2015, respectively, compared to operating income of $8.3 million and $10.8 million for the three and six months ended June 30, 2014, respectively.

Net income for the three and six months ended June 30, 2015 was $3.4 million and $3.7 million, respectively, compared to $4.5 million and $5.5 million for the three and six months ended June 30, 2014, respectively. In comparison to the prior-year periods, net income for the three and six months ended June 30, 2015 was unfavorably impacted by higher foreign currency exchange rate losses. In addition, the three months ended June 30, 2015 had lower interest expense and a lower effective tax rate, while net income for the six months ended June 30, 2015 was negatively impacted by higher interest expense, which was primarily attributable to the write off of debt issuance costs in conjunction with an amendment to the Company’s credit facility during the first quarter

21

of 2015, as well as a higher effective tax rate, due to differences 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. The Company’s diluted earnings per share for the three and six months ended June 30, 2015 were $0.09 and $0.10, respectively, compared to $0.12 and $0.15 for the three and six months ended June 30, 2014, respectively.

Results of Operations
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share data)
Revenues
$
129,629

 
$
146,242

 
$
251,967

 
$
271,183

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
95,741

 
109,172

 
189,611

 
203,874

Depreciation and amortization expense
3,169

 
2,988

 
6,251

 
5,977

Selling, general and administrative expense
24,396

 
25,778

 
47,452

 
50,510

Total costs and expenses
123,306

 
137,938

 
243,314

 
260,361

Operating income
6,323

 
8,304

 
8,653

 
10,822

Interest income and other income (expense), net
(555
)
 
(439
)
 
(1,078
)
 
(604
)
Interest expense
(356
)
 
(445
)
 
(988
)
 
(894
)
Income before income taxes
5,412

 
7,420

 
6,587

 
9,324

Income tax expense
(2,037
)
 
(2,913
)
 
(2,899
)
 
(3,801
)
Net income
$
3,375

 
$
4,507

 
$
3,688

 
$
5,523

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.12

 
$
0.10

 
$
0.15

Diluted
$
0.09

 
$
0.12

 
$
0.10

 
$
0.15

 
 
 
 
 
 
 
 

22

Additional Revenue Information:
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Technical Services:
 
 
 
 
 
 
 
On-line services
$
33,075

 
$
37,238

 
$
68,030

 
$
71,615

Off-line services
47,349

 
54,506

 
85,313

 
98,035

Other services
10,991

 
14,545

 
24,036

 
24,389

Total Technical Services
91,415

 
106,289

 
177,379

 
194,039

Engineering & Project Solutions
38,214

 
39,953

 
74,588

 
77,144

Total revenues
$
129,629

 
$
146,242

 
$
251,967

 
$
271,183

 
 
 
 
 
 
 
 
Additional Operating Income Information:
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Technical Services:
 
 
 
 
 
 
 
Americas
$
8,130

 
$
7,619

 
$
14,545

 
$
11,496

EMEA
3,229

 
4,213

 
4,465

 
7,650

Asia-Pacific
1,900

 
2,452

 
2,979

 
2,803

Total Technical Services
13,259

 
14,284

 
21,989

 
21,949

Engineering & Project Solutions1
516

 
(590
)
 
520

 
(1,347
)
Corporate2
(7,452
)
 
(5,390
)
 
(13,856
)
 
(9,780
)
Total operating income
$
6,323

 
$
8,304

 
$
8,653

 
$
10,822

____________________________
1
Includes approximately nil and $0.2 million of direct costs associated with the integration of the Furmanite Technical Solutions division for the three and six months ended June 30, 2014, respectively.
2
Includes approximately $1.7 million and $2.2 million of incremental professional fees and other costs associated with the Company’s 2015 Annual Meeting of Stockholders for the three and six months ended June 30, 2015.

23

Business Segment and Geographical Information
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
Technical Services
 
 
 
 
 
 
 
Americas
$
56,468

 
$
63,327

 
$
111,210

 
$
116,173

EMEA
23,699

 
30,219

 
45,272

 
57,443

Asia-Pacific
11,248

 
12,743

 
20,897

 
20,423

Total Technical Services
91,415

 
106,289

 
177,379

 
194,039

Engineering & Project Solutions1
38,214

 
39,953

 
74,588

 
77,144

Total revenues
129,629

 
146,242

 
251,967

 
271,183

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
 
 
 
 
 
 
 
Technical Services
 
 
 
 
 
 
 
Americas
37,161

 
42,206

 
74,432

 
78,092

EMEA
15,867

 
20,858

 
31,690

 
39,518

Asia-Pacific
7,600

 
8,753

 
14,351

 
14,306

Total Technical Services
60,628

 
71,817

 
120,473

 
131,916

Technical Services operating costs as percentage of its revenue
66.3
%
 
67.6
%
 
67.9
%
 
68.0
%
Engineering & Project Solutions1
35,113

 
37,355

 
69,138

 
71,958

Engineering & Project Solutions operating costs as percentage of its revenue
91.9
%
 
93.5
%
 
92.7
%
 
93.3
%
Total operating costs (exclusive of depreciation and amortization)
95,741

 
109,172

 
189,611

 
203,874

Operating costs as a percentage of revenue
73.9
%
 
74.7
%
 
75.3
%
 
75.2
%
Depreciation and amortization expense
 
 
 
 
 
 
 
Technical Services
 
 
 
 
 
 
 
Americas
1,980

 
1,635

 
3,859

 
3,307

EMEA
290

 
439

 
591

 
880

Asia-Pacific
277

 
266

 
549

 
536

Total Technical Services
2,547

 
2,340

 
4,999

 
4,723

Engineering & Project Solutions1
479

 
475

 
958

 
964

Corporate
143

 
173

 
294

 
290

Total depreciation and amortization expense
3,169

 
2,988

 
6,251

 
5,977

Depreciation and amortization expense as a percentage of revenue
2.4
%
 
2.0
%
 
2.5
%
 
2.2
%
Selling, general and administrative expense
 
 
 
 
 
 
 
Technical Services
 
 
 
 
 
 
 
Americas
9,197

 
11,867

 
18,374

 
23,278

EMEA
4,313

 
4,709

 
8,526

 
9,395

Asia-Pacific
1,471