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EX-2.1 - EXHIBIT 2.1 - FURMANITE CORPfrm-ex21x20150930xq3.htm
EX-10.2 - EXHIBIT 10.2 - FURMANITE CORPfrm-ex102x20150930xq3.htm
EX-10.4 - EXHIBIT 10.4 - FURMANITE CORPfrm-ex104x20150930xq3.htm
EX-10.3 - EXHIBIT 10.3 - FURMANITE CORPfrm-ex103x20150930xq3.htm
EX-32.1 - EXHIBIT 32.1 - FURMANITE CORPfrm-ex321x20150930xq3.htm
EX-31.2 - EXHIBIT 31.2 - FURMANITE CORPfrm-ex312x20150930xq3.htm
EX-31.1 - EXHIBIT 31.1 - FURMANITE CORPfrm-ex311x20150930xq3.htm
EX-32.2 - EXHIBIT 32.2 - FURMANITE CORPfrm-ex322x20150930xq3.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, 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 38,009,051 shares of the registrant’s common stock outstanding as of November 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) 
(Unaudited)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
47,130

 
$
33,753

Accounts receivable, trade (net of allowance for doubtful accounts of $1,142 and $1,036 as of September 30, 2015 and December 31, 2014, respectively)
98,427

 
93,115

Inventories, net:
 
 
 
Raw materials and supplies
26,643

 
25,626

Work-in-process
17,044

 
10,851

Finished goods
41

 
219

Deferred tax assets, current
6,467

 
6,121

Prepaid expenses and other current assets
9,944

 
9,139

Current assets of discontinued operations
2,615

 
23,866

Total current assets
208,311

 
202,690

Property and equipment
112,929

 
109,266

Less: accumulated depreciation and amortization
(63,181
)
 
(59,411
)
Property and equipment, net
49,748

 
49,855

Goodwill
15,648

 
15,648

Deferred tax assets, non-current
3,114

 
3,664

Intangible and other assets, net
7,613

 
8,991

Non-current assets of discontinued operations
10

 
3,323

Total assets
$
284,444

 
$
284,171

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
91

 
$
2,442

Accounts payable
16,704

 
18,419

Accrued expenses and other current liabilities
27,532

 
24,668

Income taxes payable
174

 
1,143

Current liabilities of discontinued operations
3,933

 
9,395

Total current liabilities
48,434

 
56,067

Long-term debt, non-current
68,891

 
61,853

Net pension liability
14,686

 
17,115

Other liabilities
7,477

 
6,653

Non-current liabilities of discontinued operations

 
19

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; 41,892,567 and 41,749,196 shares issued as of September 30, 2015 and December 31, 2014, respectively
4,851

 
4,834

Additional paid-in capital
140,633

 
139,312

Retained earnings
41,632

 
37,784

Accumulated other comprehensive loss
(24,147
)
 
(21,453
)
Treasury stock, at cost (4,008,963 shares)
(18,013
)
 
(18,013
)
Total stockholders’ equity
144,956

 
142,464

Total liabilities and stockholders’ equity
$
284,444

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
97,408

 
$
95,160

 
$
296,539

 
$
307,305

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
71,774

 
68,122

 
212,119

 
217,473

Depreciation and amortization expense
2,877

 
2,830

 
8,473

 
8,145

Selling, general and administrative expense
19,621

 
21,757

 
63,742

 
67,266

Total costs and expenses
94,272

 
92,709

 
284,334

 
292,884

Operating income
3,136

 
2,451

 
12,205

 
14,421

Interest income and other income (expense), net
146

 
174

 
(932
)
 
(429
)
Interest expense
(345
)
 
(467
)
 
(1,333
)
 
(1,356
)
Income from continuing operations before income taxes
2,937

 
2,158

 
9,940

 
12,636

Income tax expense
(1,418
)
 
(986
)
 
(4,494
)
 
(5,197
)
Income from continuing operations
1,519

 
1,172

 
5,446

 
7,439

Loss from discontinued operations, net of income tax
(1,359
)
 
(110
)
 
(1,598
)
 
(854
)
Net income
$
160

 
$
1,062

 
$
3,848

 
$
6,585

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.04

 
$
0.03

 
$
0.14

 
$
0.20

Discontinued operations
(0.04
)
 

 
(0.04
)
 
(0.02
)
Net income
$

 
$
0.03

 
$
0.10

 
$
0.18

Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.04

 
$
0.03

 
$
0.14

 
$
0.19

Discontinued operations
(0.04
)
 

 
(0.04
)
 
(0.02
)
Net income
$

 
$
0.03

 
$
0.10

 
$
0.17

Weighted-average number of common and common equivalent shares used in computing earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
37,882

 
37,659

 
37,823

 
37,615

Diluted
37,979

 
37,905

 
37,981

 
37,856

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,
 
2015
 
2014
 
2015
 
2014
Net income
$
160

 
$
1,062

 
$
3,848

 
$
6,585

Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
Net gain arising during period
642

 
1,263

 
1,112

 
838

Cash flow hedges:
 
 
 
 
 
 
 
Gain (loss) on interest rate swap
(848
)
 
108

 
(1,343
)
 
(124
)
Less: Reclassification of realized loss on interest rate swap included in interest expense

 
59

 
34

 
99

Cash flow hedges, net
(848
)
 
167

 
(1,309
)
 
(25
)
Foreign currency translation adjustments
(2,325
)
 
(3,499
)
 
(2,758
)
 
(1,832
)
Total other comprehensive loss before tax
(2,531
)
 
(2,069
)
 
(2,955
)
 
(1,019
)
Income tax (expense) benefit related to components of other comprehensive loss
209

 
(336
)
 
261

 
(168
)
Other comprehensive loss, net of tax
(2,322
)
 
(2,405
)
 
(2,694
)
 
(1,187
)
Comprehensive income (loss)
$
(2,162
)
 
$
(1,343
)
 
$
1,154

 
$
5,398

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, 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

 

 

 

 
3,848

 

 

 
3,848

Stock-based compensation, stock option exercises and vesting of restricted stock
143,371

 

 
17

 
1,303

 

 

 

 
1,320

Proceeds from disgorgement of former officer short swing profits

 

 

 
18

 

 

 

 
18

Change in pension net actuarial loss, net of tax

 

 

 

 

 
849

 

 
849

Unrealized loss on interest rate swap, net of tax

 

 

 

 

 
(785
)
 

 
(785
)
Foreign currency translation adjustment

 

 

 

 

 
(2,758
)
 

 
(2,758
)
Balances at September 30, 2015
41,892,567

 
4,008,963

 
$
4,851

 
$
140,633

 
$
41,632

 
$
(24,147
)
 
$
(18,013
)
 
$
144,956

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,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
3,848

 
$
6,585

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations, net of tax
1,598

 
854

Depreciation and amortization
8,473

 
8,145

Provision for doubtful accounts
479

 
27

Stock-based compensation expense
1,423

 
1,748

Deferred income taxes
172

 
955

Other, net
(993
)
 
(674
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(5,916
)
 
(2,575
)
Inventories
(7,090
)
 
(5,717
)
Prepaid expenses and other current assets
2,520

 
3,150

Accounts payable
(1,761
)
 
(257
)
Accrued expenses and other current liabilities
2,786

 
530

Income taxes payable
(1,949
)
 
(1,541
)
Other, net
(18
)
 
(32
)
Net cash provided by operating activities - continuing operations
3,572

 
11,198

Net cash (used in) provided by operating activities - discontinued operations
(28
)
 
4,745

Net cash provided by operating activities
3,544

 
15,943

Investing activities:
 
 
 
Capital expenditures
(7,857
)
 
(4,985
)
Acquisition of businesses

 
(265
)
Proceeds from sale of assets
320

 
17

Other
130

 

Net cash used in investing activities - continuing operations
(7,407
)
 
(5,233
)
Net cash provided by (used in) investing activities - discontinued operations
13,839

 
(187
)
Net cash provided by (used in) investing activities
6,432

 
(5,420
)
Financing activities:
 
 
 
Proceeds from issuance of debt
44,600

 

Payments on debt
(39,056
)
 
(916
)
Debt issuance costs
(571
)
 

Issuance of common stock
65

 
148

Proceeds from disgorgement of former officer short swing profits
18

 

Other
(334
)
 
(214
)
Net cash provided by (used in) financing activities
4,722

 
(982
)
Effect of exchange rate changes on cash
(1,321
)
 
(485
)
Increase in cash and cash equivalents
13,377

 
9,056

Cash and cash equivalents at beginning of period
33,753

 
33,240

Cash and cash equivalents at end of period
$
47,130

 
$
42,296

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
958

 
$
1,081

Cash paid for income taxes, net of refunds received
$
5,111

 
$
5,012

Non-cash investing and financing activities:
 
 
 
Note receivable obtained from sale of assets
$
600

 
$

Settlement of business acquisition final working capital receivable
$
2,474

 
$

Settlement of acquisition-related notes payable
$
(856
)
 
$

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

8


FURMANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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.

In the third quarter of 2015, a subsidiary of the Company sold the Furmanite Technical Solutions (“FTS”) division of the Company’s Engineering & Project Solutions operating segment. As a result, the Company has classified the operating results, assets, liabilities and cash flows attributable to FTS as discontinued operations in its consolidated financial statements in accordance with U.S. GAAP. Prior periods have been reclassified to conform to the current-year presentation. Refer to Note 2 for additional information.

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 nine months ended September 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.


9


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.

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 were originally to be effective for annual reporting periods beginning after December 15, 2016; however, in August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The ASU does not provide an option for early adoption, but as set forth in ASU 2015-14, entities are 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 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 does not expect the adoption of ASU No. 2015-02 to have any impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 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

10


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. However, in August 2015 the FASB issued ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting), which codifies certain SEC Staff views on the presentation of debt issuance costs associated with line-of-credit arrangements. The SEC Staff has stated that it will not object to the presentation of debt issuance costs associated with line-of-credit arrangements as assets, regardless of whether any borrowings are outstanding. Currently, all of the Company’s debt issuance costs pertain to its line-of-credit arrangement; therefore, the Company intends to continue recording these unamortized costs as assets rather than using the approach set forth in ASU No. 2015-03. Accordingly, the Company does not expect the adoption of ASU No. 2015-03 and ASU No. 2015-15 to have any effect on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 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 No. 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 No. 2015-11 will have a material impact on its consolidated financial statements.

2. Discontinued Operations

On September 24, 2015, the Company, through its wholly owned subsidiary Furmanite America, Inc. (“Furmanite America”), entered into an asset purchase agreement with Burrow Global, LLC (“Burrow Global”) under which Furmanite America agreed to sell to Burrow Global substantially all of the assets of the Company’s FTS division of its Engineering & Project Solutions operating segment. Additionally, Burrow Global agreed to assume certain liabilities related to FTS. Included in the sale were the FTS operations in the Beaumont, Texas; Baton Rouge, Louisiana; Lake Charles, Louisiana; Deer Park, Texas; and Freeport, Texas offices, which primarily perform in-office and in-plant engineering and non-destructive testing and inspection work for downstream clients in the Gulf Coast region. The Company has retained the process management inspection component of its Engineering & Project Solutions segment. On September 28, 2015, the closing of the transaction took place and the Company received cash proceeds of $13.8 million plus a one-year, 4% promissory note from Burrow Global for $0.6 million. The purchase price is subject to adjustment based on the final calculation of net working capital, which is to be determined within 75 days of closing in accordance with the asset purchase agreement.


11


In accordance with U.S. GAAP, the Company has classified the operating results, assets, liabilities and cash flows of FTS as discontinued operations in its consolidated financial statements. Prior periods have been reclassified to conform to the current-period presentation. Loss from discontinued operations, net of income tax, included in the consolidated statements of income consists of the following (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
22,958

 
$
28,969

 
$
75,794

 
$
88,007

Operating costs (exclusive of depreciation and amortization)
(21,848
)
 
(26,134
)
 
(71,114
)
 
(80,657
)
Depreciation and amortization expense
(333
)
 
(338
)
 
(988
)
 
(1,000
)
Selling, general and administrative expense1
(1,510
)
 
(2,669
)
 
(4,841
)
 
(7,670
)
Other income (expense), net
4

 
(3
)
 
4

 
(9
)
Loss from operations
(729
)
 
(175
)
 
(1,145
)
 
(1,329
)
Exit costs2
(1,172
)
 

 
(1,172
)
 

Loss on sale of FTS
(370
)
 

 
(370
)
 

Loss from discontinued operations, before income tax
(2,271
)
 
(175
)
 
(2,687
)
 
(1,329
)
Income tax benefit
912

 
65

 
1,089

 
475

Loss from discontinued operations, net of income tax
$
(1,359
)
 
$
(110
)
 
$
(1,598
)
 
$
(854
)
____________________________

1
For the three and nine months ended September 30, 2014, includes approximately $0.3 million and $0.5 million, respectively, of direct costs associated with management transition and integration of the FTS division.
2
For the three and nine months ended September 30, 2015, exit costs consist of the purchase of certain indemnification coverage related to the past operations of the disposed FTS division.

Assets and liabilities of discontinued operations included in the consolidated balance sheets consist of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Assets of discontinued operations
 
 
 
Current assets:
 
 
 
Accounts receivable, trade
$
24

 
$
17,104

Inventories, net

 
687

Prepaid expenses and other current assets
2,252

 
4,872

Deferred tax assets, current
339

 
1,203

Total current assets of discontinued operations
2,615

 
23,866

Non-current assets:

 

Property and equipment, net

 
2,075

Goodwill

 
249

Intangible and other assets, net
10

 
999

Total non-current assets
10

 
3,323

Total assets of discontinued operations
$
2,625

 
$
27,189

 
 
 
 
Liabilities of discontinued operations
 
 
 
Current liabilities:
 
 
 
Accounts payable
26

 
454

Accrued expenses and other current liabilities
3,907

 
8,941

Total current liabilities
3,933

 
9,395

Non-current liabilities

 
19

Total liabilities of discontinued operations
$
3,933

 
$
9,414


Included in current assets of discontinued operations at September 30, 2015 is a receivable from Burrow Global of $2.3 million related to the estimated net working capital adjustment. The remainder of the assets and liabilities of discontinued operations at

12


September 30, 2015 consist of miscellaneous residual items, primarily certain liabilities for accrued compensation and accrued expenses that were not assumed by Burrow Global.

As part of the asset purchase agreement to sell FTS, Furmanite America made customary representations and warranties, which generally survive for a period of six months following the closing of the transaction. The asset purchase agreement also contains customary indemnification provisions under which, subject to certain limitations, Furmanite America’s maximum indemnification obligations are limited to $0.8 million for breaches of representations and warranties, non-performance, uncollected net working capital and third party claims. The indemnification obligations expire two years after the closing of the transaction. The Company believes that it is remote that Furmanite America would be required to make any payment under these indemnification provisions.
    
3. Acquisition

On April 21, 2015, Furmanite America 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.

4. Earnings Per Share

Basic earnings (loss) per share (“EPS”) amounts are calculated as income from continuing operations, loss from discontinued operations or net income, as applicable, 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 from continuing operations include the following (in thousands, except per share data):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Income from continuing operations
$
1,519

 
$
1,172

 
$
5,446

 
$
7,439

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
37,882

 
37,659

 
37,823

 
37,615

Dilutive effect of common stock equivalents
97

 
246

 
158

 
241

Diluted weighted-average common shares outstanding
37,979

 
37,905

 
37,981

 
37,856

 
 
 
 
 
 
 
 
Earnings per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.04

 
$
0.03

 
$
0.14

 
$
0.20

Diluted
$
0.04

 
$
0.03

 
$
0.14

 
$
0.19

Stock options and restricted stock units excluded from diluted weighted-average common shares outstanding because their inclusion would have an anti-dilutive effect:
849

 
395

 
645

 
323



13


5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Compensation and benefits
$
17,045

 
$
15,171

Estimated potential uninsured liability claims
2,434

 
1,934

Professional, audit and legal fees
1,909

 
1,050

Taxes other than income
1,697

 
1,668

Value added tax payable
1,194

 
1,668

Customer deposits
739

 
651

Other employee related expenses
595

 
630

Derivative instrument
309

 

Leases
202

 
115

Interest
112

 
356

Other
1,296

 
1,425

Total accrued expenses and other current liabilities
$
27,532

 
$
24,668



6. Long-Term Debt

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

 
$
59,300

Capital leases

 
8

Notes payable

 
4,896

Other debt
91

 
91

Total long-term debt
68,982

 
64,295

Less: current portion of long-term debt
(91
)
 
(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 September 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 1.5% at September 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,

14


as described above, beginning March 13, 2016 through March 13, 2020 on $40.0 million of the outstanding amount under the Credit Agreement. This 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 10 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 September 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 $202.2 million as of September 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 September 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 September 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 3, 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.

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 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.


15


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,
 
2015
 
2014
 
2015
 
2014
Service cost
$
40

 
$
76

 
$
124

 
$
233

Interest cost
828

 
1,025

 
2,455

 
3,082

Expected return on plan assets
(917
)
 
(1,102
)
 
(2,718
)
 
(3,315
)
Amortization of net actuarial loss
130

 
125

 
386

 
377

Net curtailment/settlement gain

 

 
(332
)
 

Net periodic pension cost (credit)
$
81

 
$
124

 
$
(85
)
 
$
377


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 $1.2 million has been contributed through September 30, 2015.

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, 2015, the total compensation cost charged against income and included in selling, general and administrative expenses for stock-based compensation arrangements was $0.2 million and $1.4 million, respectively, and $0.9 million and $1.7 million for the three and nine months ended September 30, 2014, respectively. Compensation cost for the nine months ended September 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. 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.

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 third quarter of 2015, the Company granted 291,443 restricted stock units to employees at a grant date fair value of $3.94 per share, with vesting contingent upon the outcome of the Company’s total shareholder return over a three-year performance period compared to a group of peer companies. In accordance with U.S. GAAP, the calculated grant date fair value incorporates the expected outcome of this market condition. Also during the third quarter of 2015, the Company granted 64,763 of time-based restricted stock units to employees at a grant date fair value of $6.52 per share, which vest one-third annually over a three-year period.

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.

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

16



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, 2015, the total unrecognized compensation expense related to stock options and restricted stock/unit awards was $1.5 million and $2.5 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,
2015
 
December 31,
2014
Defined benefit pension items
$
(21,068
)
 
$
(22,180
)
Less: deferred tax benefit
4,260

 
4,523

Net of tax
(16,808
)
 
(17,657
)
Interest rate swap
(1,214
)
 
95

Less: deferred tax benefit (liability)
486

 
(38
)
Net of tax
(728
)
 
57

Foreign currency translation adjustment
(6,611
)
 
(3,853
)
Total accumulated other comprehensive loss
$
(24,147
)
 
$
(21,453
)


17


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, 2015 and 2014 (in thousands):
 
Defined
Benefit
Pension Items
 
Interest
Rate
Swap
 
Foreign
Currency
Translation Adjustment
 
Accumulated
Other
Comprehensive
Loss
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
Beginning balance, net
$
(17,319
)
 
$
(220
)
 
$
(4,286
)
 
$
(21,825
)
Other comprehensive income (loss) before reclassifications1
411

 
(508
)
 
(2,325
)
 
(2,422
)
Amounts reclassified from accumulated other comprehensive loss2 3
100

 

 

 
100

Net other comprehensive income (loss)
511

 
(508
)
 
(2,325
)
 
(2,322
)
Ending balance, net
$
(16,808
)
 
$
(728
)
 
$
(6,611
)
 
$
(24,147
)
 
 
 
 
 
 
 
 
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
)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
 
 
Beginning balance, net
$
(17,657
)
 
$
57

 
$
(3,853
)
 
$
(21,453
)
Other comprehensive income (loss) before reclassifications1
306

 
(805
)
 
(2,758
)
 
(3,257
)
Amounts reclassified from accumulated other comprehensive loss2 3
543

 
20

 

 
563

Net other comprehensive income (loss)
849

 
(785
)
 
(2,758
)
 
(2,694
)
Ending balance, net
$
(16,808
)
 
$
(728
)
 
$
(6,611
)
 
$
(24,147
)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
 
 
 
 
 
Beginning balance, net
$
(16,950
)
 
$
132

 
$
1,206

 
$
(15,612
)
Other comprehensive income (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
)
____________________________
1
Net of tax expense for the defined benefit pension plans of $0.1 million for each of the three and nine months ended September 30, 2015, respectively, and $0.2 million and $0.1 million for the three and nine months ended September 30, 2014, respectively. Net of tax benefit for the interest rate swap of $0.3 million and $0.5 million for the three and nine months ended September 30, 2015, respectively, and was insignificant for the three and nine months ended September 30, 2014.

2
Net of tax expense for the defined benefit pension plans, which was $0.2 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively, and was insignificant for both the three months ended September 30, 2015 and 2014. Net of tax expense for the interest swap, which was insignificant for each of the three and nine months ended September 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 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.

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,

18


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 September 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 September 30, 2015 and December 31, 2014 (in thousands):
 
 
 
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
 
 
 
September 30, 2015
 
September 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
 
$
309

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

 
Other liabilities
 
905

Total
 
 
 
 
 
$

 
 
 
$
1,214

 
 
 
 
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 14 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 September 30, 2015, the Company estimates that approximately $0.3 million will be reclassified from accumulated other comprehensive loss as an increase in interest expense over the next twelve months.


19


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,
 
2015
 
2014
 
2015
 
2014
Amount of income (loss) recognized in other comprehensive income (loss) for the interest rate swap, net of tax (effective portion)
$
(509
)
 
$
65

 
$
(806
)
 
$
(74
)
Amount of loss reclassified from accumulated other comprehensive loss into interest expense for the interest rate swap, net of tax (effective portion)

 
(35
)
 
(20
)
 
(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, 2015 and 2014, the Company recorded income tax expense of $4.5 million and $5.2 million, respectively, in continuing operations. For the three months ended September 30, 2015 and 2014, the Company recorded income tax expense of $1.4 million and $1.0 million, respectively, in continuing operations. 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 from continuing operations before income taxes was 45.2% and 41.1% for the nine months ended September 30, 2015 and 2014, respectively, and 48.3% and 45.7% for the three months ended September 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.

The income tax benefit attributable to discontinued operations was $1.1 million and $0.5 million for the nine months ended September 30, 2015 and 2014, respectively, and was $0.9 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively.

Unrecognized Tax Benefits

A reconciliation of the change in the unrecognized tax benefits for the nine months ended September 30, 2015 is as follows (in thousands):
Balance at December 31, 2014
$
779

Additions based on tax positions of current year
358

Balance at September 30, 2015
$
1,137


Unrecognized tax benefits at September 30, 2015 and December 31, 2014 of $1.1 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 nine months ended September 30, 2015 or 2014 related to underpayments of income taxes or uncertain tax positions.

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

20


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 September 30, 2015 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 was involved in disputes with a customer, INEOS USA LLC (“INEOS”), which claimed that Furmanite America failed to provide it with satisfactory services at the customer’s facilities. On October 26, 2015, the parties entered into a settlement agreement, disposing of all claims under this matter for $2.1 million. As of September 30, 2015, this settlement payment amount to INEOS had been accrued in full in the Company’s consolidated financial statements.

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”), claiming that a certain provision of the Company’s now-expired stockholder rights plan was unenforceable and that the Defendants had breached their fiduciary duties with respect to certain corporate governance matters. Due to certain actions taken by the Company in March 2015, the Plaintiff’s claims became muted. In June 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 completing certain actions, which it has done, thereby closing the Action.

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 $2.4 million and $1.9 million, which include the Furmanite America litigation, were recorded in accrued expenses and other current liabilities as of September 30, 2015 and December 31, 2014, respectively. 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. 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. The Engineering & Project Solutions segment provides process management inspection services to contractors and operators participating primarily in the midstream oil and gas market, substantially all of which are in the Americas. A wide range of inspection services are offered, including, mechanical integrity, quality assurance and regulatory compliance services for pipelines and other capital, turnaround, maintenance and mechanical integrity projects. Previously, the Engineering & Project Solutions segment also included the operations of the FTS division, which provided professional engineering, construction management and plant asset management services. As a result of the sale of FTS in September 2015, the operating results of FTS have been reclassified to discontinued operations, as detailed in Note 2. Accordingly, FTS is excluded from the presentation of segment information below. Prior period segment information has been restated to conform to the current-period presentation.

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.


21


The following is a summary of the financial information of the Company’s reportable segments for the three and nine months ended September 30, 2015 and 2014 reconciled to the amounts reported in the consolidated financial statements (in thousands):
 
Technical Services
 
Engineering & Project Solutions
 
Corporate3
 
Reconciling
Items4
 
Total
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
81,938

 
$
15,470

 
$

 
$

 
$
97,408

Intersegment revenues

 

 

 

 

Operating income (loss)2
$
6,517

 
$
963

 
$
(4,344
)
 
$

 
$
3,136

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
85,762

 
$
9,398

 
$

 
$

 
$
95,160

Intersegment revenues

 

 

 

 

Operating income (loss)2
$
7,832

 
$
307

 
$
(5,688
)
 
$

 
$
2,451

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
259,317

 
$
37,222

 
$

 
$

 
$
296,539

Intersegment revenues

 

 

 

 

Operating income (loss)2
$
28,506

 
$
1,899

 
$
(18,200
)
 
$

 
$
12,205

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenues from external customers1
$
279,801

 
$
27,504

 
$

 
$

 
$
307,305

Intersegment revenues

 

 

 

 

Operating income (loss)2
$
29,781

 
$
108

 
$
(15,468
)
 
$

 
$
14,421

____________________________
1
Included in the Technical Services and Engineering & Project Solutions segments are total United States revenues of $66.2 million and $197.2 million for the three and nine months ended September 30, 2015, respectively, and $57.6 million and $189.6 million for the three and nine months ended September 30, 2014, respectively. Additionally, the Company had United States revenues classified within discontinued operations of $23.0 million and $75.8 million for the three and nine months ended September 30, 2015, respectively, and $29.0 million and $88.0 million for the three and nine months ended September 30, 2014, respectively, which is not included in the presentation above. Total foreign revenues for the three and nine months ended September 30, 2015 totaled $31.2 million and $99.3 million, respectively, and $37.5 million and $117.7 million for the three and nine months ended September 30, 2014, respectively. Included in the Technical Services segment above are United Kingdom revenues of $13.9 million and $43.9 million for the three and nine months ended September 30, 2015, respectively, and $16.2 million and $53.1 million for the three and nine months ended September 30, 2014, respectively. Revenues attributable to individual countries are based on the country of domicile of the legal entity that performs the work.

2
For the three and nine months ended September 30, 2015, Corporate includes nil and approximately $2.2 million, respectively, of incremental, non-routine professional fees and other costs associated with the Company’s 2015 Annual Meeting of Stockholders. Also, 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.
    
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.

4
Reconciling items, if any, represent eliminations or reversals of transactions between reportable segments.
    

The following includes total assets based on the Company’s reportable segments reconciled to the amounts reported in the consolidated balance sheets (in thousands):
 
September 30,
2015
 
December 31,
2014
Total assets
 
 
 
Technical Services
237,831

 
$
233,243

Engineering and Project Solutions
16,051

 
8,207

Corporate1
27,937

 
15,532

Discontinued operations2
2,625

 
27,189

Total assets
$
284,444

 
$
284,171

____________________________
1
Corporate represents assets that are not allocated to reportable segments.
2
Refer to Note 2 for additional information.


22


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,
2015
 
December 31,
2014
Total long-lived assets
 
 
 
United States
$
43,033

 
$
46,958

United Kingdom
5,368

 
5,005

All other
6,389

 
7,376

Total long-lived assets
$
54,790

 
$
59,339


14. Fair Value of Financial Instruments and Concentration of 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, 2015 and December 31, 2014 (in thousands):
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
September 30, 2015
 
 
 
 
 
 
 
Interest rate swap asset
$

 
$

 
$

 
$

Interest rate swap liability
$
1,214

 
$

 
$
1,214

 
$

 
 
 
 
 
 
 
 
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 10 for additional information on the Company’s interest rate swap. The estimated fair value of all debt as of September 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 nine months ended September 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

23


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

15. 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.

16. Subsequent Event
On November 1, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Team, Inc. (“Team”) and Team’s wholly owned subsidiary TFA, Inc. (“Merger Sub”) whereby, upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Team. The Merger Agreement was unanimously approved and adopted by the Board of Directors of each of the Company and Team. At the effective time of the Merger, each share of the Company’s common stock will be converted into the right to receive 0.215 shares of common stock of Team. The parties’ obligations to complete the Merger are subject to several customary conditions, including, among others, approval of the Merger by the Company’s stockholders and approval of the issuance of Team common stock in the Merger by Team’s stockholders, the receipt of certain regulatory approvals (including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and other customary closing conditions. Additionally, the Merger Agreement provides that upon termination of the Merger Agreement under certain circumstances, the Company or Team, as applicable, will be obligated to (depending on the circumstances of termination) pay a termination fee of $10.0 million or reimburse the other party’s reasonable documented merger-related expenses up to $3.0 million.


24



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”), incorporated in 1953, together with its subsidiaries (collectively the “Company” or “Furmanite”) operates in two segments that are based on its service and product offerings: 1) Technical Services and 2) Engineering & Project Solutions. 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 process management inspection services to contractors and operators participating primarily in the midstream oil and gas market, substantially all of which are in the Americas. A wide range of inspection services are offered, including, mechanical integrity, quality assurance and regulatory compliance services for pipelines and other capital, turnaround, maintenance and mechanical integrity projects.

On September 24, 2015, the Company, through its wholly owned subsidiary Furmanite America, Inc. (“Furmanite America”), entered into an asset purchase agreement with Burrow Global, LLC (“Burrow Global”) under which Furmanite America agreed to sell to Burrow Global substantially all of the assets of the Company’s Furmanite Technical Solutions (“FTS”) division of its Engineering & Project Solutions operating segment. Additionally, Burrow Global agreed to assume certain liabilities related to FTS. Included in the sale were the FTS operations in the Beaumont, Texas; Baton Rouge, Louisiana; Lake Charles, Louisiana; Deer Park, Texas; and Freeport, Texas offices, which primarily perform in-office and in-plant engineering and non-destructive testing and inspection work for downstream clients in the Gulf Coast region. The Company has retained the process management inspection component of its Engineering & Project Solutions segment. The Company expects that the sale of FTS will allow the Company to focus on its higher margin specialty services and is intended to further its strategy to drive shareholder value. As a result of the sale, the operating results, assets, liabilities and cash flows attributable to FTS are reported as discontinued operations in the Company’s consolidated financial statements.

On November 1, 2015, the Company entered into an Agreement and Plan of Merger with Team, Inc. Refer to the Other Events section on page 35 for additional information.

Financial Overview

Consolidated revenues from continuing operations decreased $10.8 million, or 3.5%, to $296.5 million for the nine months ended September 30, 2015, but increased $2.2 million, or 2.4%, to $97.4 million for the three months ended September 30, 2015, compared to the prior year periods. Revenues in the Technical Services segment were adversely affected by foreign exchange rate changes, which resulted in unfavorable impacts of $5.2 million and $15.4 million for the three and nine months ended September 30, 2015, respectively, compared to the prior year periods due to strengthening of the U.S. Dollar against most of the functional currencies in the countries in which the Company operates. Excluding the foreign currency impacts for the nine months ended September 30, 2015, decreases in revenues in the EMEA region of the Technical Services segment and, to a lesser extent, the Americas were partially offset by higher revenues in Asia-Pacific. For the three months ended September 30, 2015, excluding the foreign currency impact, revenue increases in the Americas and Asia-Pacific, were partially offset by lower revenues in EMEA. Revenues in the Engineering & Project Solutions operating segment increased during both the three and nine months ended September 30, 2015, compared to the same periods in 2014, reflecting substantial volume increases in process management inspection services.


25


Operating results for the nine months ended September 30, 2015 were unfavorably impacted by the aforementioned foreign exchange rate changes and the lower activity within the EMEA region as well as 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 Engineering & Project Solutions segment for the nine months ended September 30, 2015. The net effect of these factors resulted in operating income of $12.2 million for the nine months ended September 30, 2015, compared to operating income of $14.4 million for the nine months ended September 30, 2014. Operating income for the three months ended September 30, 2015 was $3.1 million, compared to $2.5 million for the same period in 2014. The improvement for the quarter reflects lower corporate-related expenses and higher operating income in the Engineering & Project solutions segment, partially offset by the effect of lower operating results in the Technical Services segment.

Income from continuing operations for the nine months ended September 30, 2015 was $5.4 million, or $0.14 per diluted share, compared to $7.4 million, or $0.19 per share, for the nine months ended September 30, 2014, while income from continuing operations for the three months ended September 30, 2015 was $1.5 million, or $0.04 per share, compared to $1.2 million, or $0.03 per share, for the three months ended September 30, 2014.

Loss from discontinued operations, net of income tax, reflects the operating results and disposal of the Company’s FTS division. The loss from discontinued operations for the nine months ended September 30, 2015 was $1.6 million, or $0.04 per diluted share, compared to $0.9 million, or $0.02 per share, for nine months ended September 30, 2014. The loss from discontinued operations for the three months ended September 30, 2015 was $1.4 million, or $0.04 per diluted share, compared to $0.1 million, or less than $0.01 per share, for the three months ended September 30, 2014. The increased loss from discontinued operations is primarily due to exit costs and the loss on disposal of FTS in 2015 combined with year-over-year differences in operating losses attributable to FTS.

The combined effect of income from continuing operations and the loss from discontinued operations resulted in net income of $3.8 million, or $0.10 per diluted share, for the nine months ended September 30, 2015, compared to $6.6 million, or $0.17 per share, for the same period in 2014. For the three months ended September 30, 2015, net income was $0.2 million, or less than $0.01 per share, compared to $1.1 million, or $0.03 per share for the same period in 2014.

26


Results of Operations
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share data)
Revenues
$
97,408

 
$
95,160

 
$
296,539

 
$
307,305

Costs and expenses:
 
 
 
 
 
 
 
Operating costs (exclusive of depreciation and amortization)
71,774

 
68,122

 
212,119

 
217,473

Depreciation and amortization expense
2,877

 
2,830

 
8,473

 
8,145

Selling, general and administrative expense
19,621

 
21,757

 
63,742

 
67,266

Total costs and expenses
94,272

 
92,709

 
284,334

 
292,884

Operating income
3,136

 
2,451

 
12,205

 
14,421

Interest income and other income (expense), net
146

 
174

 
(932
)
 
(429
)
Interest expense
(345
)
 
(467
)
 
(1,333
)
 
(1,356
)
Income from continuing operations before income taxes
2,937

 
2,158

 
9,940

 
12,636

Income tax expense
(1,418
)
 
(986
)
 
(4,494
)
 
(5,197
)
Income from continuing operations
1,519

 
1,172

 
5,446

 
7,439

Loss from discontinued operations, net of income tax
(1,359
)
 
(110
)
 
(1,598
)
 
(854
)
Net income
$
160

 
$
1,062

 
$
3,848

 
$
6,585

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.04

 
$
0.03

 
$
0.14

 
$
0.20

Discontinued operations
(0.04
)
 

 
(0.04
)
 
(0.02
)
Net income
$

 
$
0.03

 
$
0.10

 
$
0.18

Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.04

 
$
0.03