Furmanite 10Q 2011 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		for the transition period from to

Commission File Number 001-05083

FURMANITE CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		74-1191271
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2435 North Central Expressway
Suite 700
Richardson, Texas		75080
(Address of principal executive offices)		(Zip Code)

(972) 699-4000
(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.þYeso No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yeso No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

There were 36,946,656 shares of the registrant’s common stock outstanding as of May 4, 2011.

FURMANITE CORPORATION AND SUBSIDIARIES
INDEX


	Page
	Number
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		3

PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010		4
Consolidated Income Statements for the Three Months Ended March 31, 2011 and 2010 (unaudited)		5
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2011 (unaudited) and for the Year Ended December 31, 2010		6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)		7
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2011 and 2010 (unaudited)		8
Notes to Consolidated Financial Statements (unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosure About Market Risk		28
Item 4. Controls and Procedures		28

PART II. Other Information
Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 6. Exhibits		31
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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. 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. 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.

PART I — FINANCIAL INFORMATION

ITEM 1.Financial Statements

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	March 31,			December 31,
	2011			2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	33,121		$	37,170
Accounts receivable, trade (net of allowance for doubtful accounts of $1,672 and $1,497 as of March 31, 2011 and December 31, 2010, respectively)		68,099			63,630
Inventories, net of reserve:
Raw materials and supplies		19,041			17,375
Work-in-process		8,242			6,906
Finished goods		207			85
Prepaid expenses and other current assets		6,844			5,951

Total current assets		135,554			131,117
Property and equipment		80,451			73,969
Less: accumulated depreciation and amortization		(45,761	)		(43,249	)

Property and equipment, net		34,690			30,720
Goodwill		14,338			13,148
Deferred tax assets		2,955			2,872
Intangible and other assets		8,792			4,244

Total assets	$	196,329		$	182,101


Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	2,723		$	76
Accounts payable		18,221			17,815
Accrued expenses and other current liabilities		27,132			24,488
Income taxes payable		190			557

Total current liabilities		48,266			42,936
Long-term debt, non-current		32,797			30,085
Net pension liability		8,695			8,432
Other liabilities		2,552			2,560

Commitments and contingencies (Note 11)

Stockholders’ equity:
Series B Preferred Stock, unlimited shares authorized, none outstanding		—			—
Common stock, no par value; 60,000,000 shares authorized; 40,955,619 and 40,925,619 shares issued as of March 31, 2011 and December 31, 2010, respectively		4,745			4,745
Additional paid-in capital		132,338			132,132
Accumulated deficit		(8,347	)		(12,373	)
Accumulated other comprehensive loss		(6,704	)		(8,403	)
Treasury stock, at cost (4,008,963 shares as of March 31, 2011 and December 31, 2010)		(18,013	)		(18,013	)

Total stockholders’ equity		104,019			98,088

Total liabilities and stockholders’ equity	$	196,329		$	182,101

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share data)

(Unaudited)


	For the Three Months
	Ended March 31,
	2011			2010
Revenues	$	73,054		$	66,435
Costs and expenses:
Operating costs (exclusive of depreciation and amortization)		50,443			45,662
Depreciation and amortization expense		1,875			1,549
Selling, general and administrative expense		16,911			18,763

Total costs and expenses		69,229			65,974

Operating income		3,825			461
Interest income and other income (expense), net		122			342
Interest expense		(240	)		(241	)

Income before income taxes		3,707			562
Income tax benefit (expense)		319			(171	)

Net income	$	4,026		$	391


Earnings per common share:
Basic	$	0.11		$	0.01
Diluted	$	0.11		$	0.01

Weighted-average number of common and common equivalent shares used in computing net income per common share:
Basic		36,925			36,689
Diluted		37,264			36,809

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2011 (Unaudited) and Year Ended December 31, 2010

(in thousands, except share data)


													Accumulated
							Additional						Other
	Common Shares				Common		Paid-In			Accumulated			Comprehensive			Treasury
	Issued		Treasury		Stock		Capital			Deficit			Loss			Stock			Total

Balances at January 1, 2010		40,682,815		4,008,963	$	4,723	$	132,106		$	(21,859	)	$	(11,627	)	$	(18,013	)	$	85,330
Net income		—		—		—		—			9,486			—			—			9,486
Stock-based compensation and stock option exercises		242,804		—		22		1,469			—			—			—			1,491
Change in pension net actuarial loss and prior service credit, net of tax		—		—		—		—			—			3,484			—			3,484
Other								(1,443	)											(1,443	)
Foreign currency translation adjustment		—		—		—		—			—			(260	)		—			(260	)

Balances at December 31, 2010		40,925,619		4,008,963	$	4,745	$	132,132		$	(12,373	)	$	(8,403	)	$	(18,013	)	$	98,088

Net income		—		—		—		—			4,026			—			—			4,026
Stock-based compensation and stock option exercises		30,000		—		—		206			—			—			—			206
Change in pension net actuarial loss and prior service credit, net of tax		—		—		—		—			—			(225	)		—			(225	)
Foreign currency translation adjustment		—		—		—		—			—			1,924			—			1,924

Balances at March 31, 2011		40,955,619		4,008,963	$	4,745	$	132,338		$	(8,347	)	$	(6,704	)	$	(18,013	)	$	104,019

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Three Months
	Ended March 31,
	2011			2010
Operating activities:
Net income	$	4,026		$	391
Reconciliation of net income to net cash used in operating activities:
Depreciation and amortization		1,875			1,549
Provision for doubtful accounts		101			112
Deferred income taxes		(1,217	)		35
Stock-based compensation expense		206			350
Other, net		225			136
Changes in operating assets and liabilities:
Accounts receivable		(4,323	)		(930	)
Inventories		(2,918	)		(1,241	)
Prepaid expenses and other current assets		(616	)		672
Accounts payable		462			200
Accrued expenses and other current liabilities		2,575			(2,587	)
Income taxes payable		(341	)		(588	)
Other, net		(80	)		(47	)

Net cash used in operating activities		(25	)		(1,948	)

Investing activities:
Capital expenditures		(759	)		(2,365	)
Acquisition of assets and business, net of cash acquired of $1,078 in 2011		(3,921	)		(200	)
Proceeds from sale of assets		32			164

Net cash used in investing activities		(4,648	)		(2,401	)

Financing activities:
Payments on debt		(35	)		(52	)

Net cash used in financing activities		(35	)		(52	)

Effect of exchange rate changes on cash		659			(298	)


Decrease in cash and cash equivalents		(4,049	)		(4,699	)
Cash and cash equivalents at beginning of period		37,170			36,117

Cash and cash equivalents at end of period	$	33,121		$	31,418


Supplemental cash flow information:
Cash paid for interest	$	192		$	200
Cash paid for income taxes, net of refunds received	$	936		$	596

Non-cash investing and financing activities:
Issuance of notes payable to equity holders related to acquistion of business	$	5,300		$	—

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)
(Unaudited)


	For the Three Months
	Ended March 31,
	2011			2010
Net income	$	4,026		$	391
Other comprehensive income (loss):
Change in pension net actuarial loss and prior service credit, net of tax		(225	)		932
Foreign currency translation adjustments		1,924			(2,200	)
Total other comprehensive income (loss)		1,699			(1,268	)
Comprehensive income (loss)	$	5,725		$	(877	)

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

FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

1. General and Summary of Significant Accounting Policies

General

The consolidated interim financial statements include the accounts of Furmanite Corporation (the “Parent Company”) and its subsidiaries (collectively, the “Company” or “Furmanite”). All intercompany transactions and balances have been eliminated in consolidation. These unaudited consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnote disclosures required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) and accruals, necessary for a fair presentation of the financial statements, have been made. Interim results of operations are not necessarily indicative of the results that may be expected for the full year.

Revenue Recognition

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

Revenues are based primarily on time and materials. Substantially all projects are generally short term in nature. Revenues are recognized when persuasive evidence of an arrangement exists, services to customers have been rendered or products have been delivered and risk of ownership has passed to the customer, the selling price is fixed or determinable and collectability is reasonably assured. Revenues are recorded, net of sales tax. The Company provides limited warranties to customers, depending upon the service performed. Warranty claim costs were not material during the three months ended March 31, 2011 or 2010.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the weighted average cost method. Inventory quantities on hand are reviewed regularly based on related service levels and functionality, and carrying cost is reduced to net realizable value for inventories in which their cost exceeds their utility, due to physical deterioration, obsolescence, changes in price levels or other causes. The excess and obsolete reserve was $1.7 million and $1.8 million at March 31, 2011 and December 31, 2010, respectively. Inventories consumed or products sold are included in operating costs.

New Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update 2010-06,Improving Disclosures about Fair Value Measurements(“ASU 2010-06”). ASU 2010-06 provides more robust disclosures about the transfers between Levels 1 and 2, the activity in Level 3 fair value measurements and clarifies the level of disaggregation and disclosure related to the valuation techniques and inputs used. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. There was not a material impact from the adoption of this guidance on the Company’s consolidated financial statements.

2. Acquisition

On February 23, 2011, Furmanite Worldwide, Inc. (“FWI”), a wholly owned subsidiary of the Parent Company, entered into a Stock Purchase Agreement to acquire 100% of the outstanding stock of Self Leveling Machines, Inc. and a subsidiary of FWI entered into an Asset Purchase Agreement to acquire substantially all of the material operating and intangible assets of Self Levelling Machines Pty. Ltd. (collectively, “SLM”) for total consideration of $9.2 million, net of cash acquired of $1.1 million. SLM provides large scale on-site machining, which includes engineering, fabrication and execution of highly-specialized machining solutions for large-scale equipment or operations.

In connection with the SLM acquisition, on February 23, 2011, FWI entered into a consent and waiver agreement under its credit agreement. See Note 6, “Long-Term Debt,” to these consolidated financial statements for additional information as it relates to the credit agreement. FWI funded the cost of the acquisition with $5.0 million in cash and by issuing notes payable (the “Notes”) to the sellers’ equity holders for $5.3 million.

The final determinations of fair value for certain assets and liabilities remain subject to change based on final valuations of the assets acquired and liabilities assumed. The following amounts represent the preliminary determination of the fair value of the assets acquired and liabilities assumed (in thousands):

Fair value of net assets acquired


Cash	$	1,078
Accounts receivable		224
Prepaid expenses and other current assets		123
Property and equipment		4,450
Goodwill¹		1,190
Intangible and other assets²		4,525
Accrued expenses and other current liabilities		(100	)
Deferred tax liabilities		(1,190	)

Fair value of net assets acquired	$	10,300


¹		Goodwill consists of intangible assets that do not qualify for separate recognition and is not expected to be deductible for tax purposes.

²		Intangible assets are primarily comprised of trademarks, patents, and non-compete arrangements. Other assets consist of acquired interests in equity and cost method investments.

The SLM acquisition is insignificant to the Company’s financial position and results of operations, therefore, SLM’s pro forma results would not have a significant impact on the Company’s results had the acquisition occurred at the beginning of the current or previous year.

3. Earnings Per Share

Basic earnings per share are calculated as net income divided by the weighted-average number of shares of common stock and restricted stock outstanding during the period. Diluted earnings per share assumes issuance of the net incremental shares from stock options when dilutive. The weighted-average common shares outstanding used to calculate diluted earnings per share reflect the dilutive effect of common stock equivalents including options to purchase shares of common stock, using the treasury stock method.

Basic and diluted weighted-average common shares outstanding and earnings per share include the following (in thousands, except per share data):


	For the Three Months
	Ended March 31,
	2011		2010
Net income	$	4,026	$	391

Basic weighted-average common shares outstanding		36,925		36,689
Dilutive effect of common stock equivalents		339		120

Diluted weighted-average common shares outstanding		37,264		36,809

Earnings per share:
Basic	$	0.11	$	0.01
Dilutive	$	0.11	$	0.01

Stock options excluded from diluted weighted-average common shares outstanding because their inclusion would have an anti-dilutive effect:		309		605

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):


	March 31,		December 31,
	2011		2010
Compensation and benefits^¹	$	18,138	$	15,130
Estimated potential uninsured liability claims		1,886		1,886
Value added tax payable		1,431		1,387
Taxes other than income		1,523		1,052
Professional, audit and legal fees		649		1,088
Customer deposit		740		615
Other employee related expenses		234		550
Rent		360		327
Interest		39		20
Other^²		2,132		2,433

	$	27,132	$	24,488


^¹		Includes restructuring accruals of $0.5 million and $1.1 million as of March 31, 2011 and December 31, 2010, respectively.

^²		Includes restructuring accruals of $0.5 million at each of March 31, 2011 and December 31, 2010.

5. Restructuring

During the fourth quarter of 2009 and in the first half of 2010, the Company committed to cost reduction initiatives, including planned workforce reductions and restructuring of certain functions. The Company has taken these specific actions in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues.

2009 Cost Reduction Initiative

The Company completed this cost reduction initiative during 2010 and incurred total costs since inception of approximately $3.4 million. During the first quarter of 2010, the Company recorded $1.9 million in restructuring charges of which $0.7 million and $1.2 million are included in operating costs and selling, general and administrative expenses, respectively. No costs were incurred during 2011 related to this initiative.

2010 Cost Reduction Initiative

During the second quarter of 2010, the Company committed to an additional cost reduction initiative, primarily related to the restructuring of certain functions within the Company’s EMEA operations (which includes operations in Europe, the Middle East and Africa). The Company took specific actions in order to improve the operational and administrative efficiency of its EMEA operations, while providing a structure which will allow for future expansion of operations within the region. For the three months ended March 31, 2011, restructuring costs incurred of $41 thousand and $47 thousand are included in operating costs and selling, general and administrative expenses, respectively. The total restructuring costs estimated to be incurred in connection with this cost reduction initiative are $4.0 million. As of March 31, 2011, the costs incurred since the inception of this cost reduction initiative totaled approximately $3.5 million, with the remaining $0.5 million expected to relate primarily to severance and benefits and lease termination costs.

In connection with these initiatives, the Company recorded estimated expenses for severance, lease cancellations, and other restructuring costs in accordance with FASB ASC 420-10, “Exit or Disposal Cost Obligations” and FASB ASC 712-10, “Nonretirement Postemployment Benefits.”

The activity related to reserves associated with the cost reduction initiatives for the three months ended March 31, 2011, is as follows (in thousands):


	Reserve at
	December 31,								Foreign currency		Reserve at
	2010		Charges			Cash payments			adjustments		March 31, 2011

2009 Initiative
Severance and benefit costs	$	107	$	—		$	(110	)	$	3	$	—
Lease termination costs		125		—			—			4		129
Other restructuring costs		9		—			—			1		10

2010 Initiative
Severance and benefit costs		969		84			(601	)		47		499
Lease termination costs		277		(2	)		(9	)		18		284
Other restructuring costs		90		6			(25	)		6		77

	$	1,577	$	88		$	(745	)	$	79	$	999

Restructuring costs associated with the cost reduction initiatives consist of the following (in thousands):


	For the Three Months
	Ended March 31,
	2011			2010
Severance and benefit costs	$	84		$	1,186
Lease termination costs		(2	)		316
Other restructuring costs		6			352

	$	88		$	1,854

Restructuring costs were incurred in the following geographical areas (in thousands):


	For the Three Months
	Ended March 31,
	2011		2010
Americas	$	—	$	186
EMEA		88		1,668

	$	88	$	1,854

Total workforce reductions related to the cost reduction initiatives included terminations for 165 employees, which include reductions of 31 employees in the Americas (which includes operations in North America, South America and Latin America), 133 employees in EMEA, and one employee in Asia-Pacific.

6. Long-Term Debt

Long-term debt consists of the following (in thousands):


	March 31,			December 31,
	2011			2010
Borrowings under the revolving credit facility (the “Credit Agreement”)	$	30,000		$	30,000
Capital leases		128			161
Notes payable (the “Notes”)		5,392			—

Total long-term debt		35,520			30,161
Less: current portion of long-term debt		(2,723	)		(76	)

Total long-term debt, non-current	$	32,797		$	30,085

On August 4, 2009, FWI and certain foreign subsidiaries of FWI (the “designated borrowers”) entered into a credit agreement dated July 31, 2009 with a banking syndicate comprising Bank of America, N.A. and Compass Bank (the “Credit Agreement”). The Credit Agreement, which matures on January 31, 2013, provides a revolving credit facility of up to $50.0 million. A portion of the amount available under the Credit Agreement (not in excess of $20.0 million) is available for the issuance of letters of credit. In addition, a portion of the amount available under the Credit Agreement (not in excess of $5.0 million in the aggregate) is available for swing line loans to FWI. The loans outstanding under the Credit Agreement may not exceed $35.0 million in the aggregate to the designated borrowers.

At each of March 31, 2011 and December 31, 2010, $30.0 million was outstanding under the Credit Agreement. Borrowings under the Credit Agreement bear interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate, at the option of the borrower, including a margin above such rates, and subject to an adjustment based on a calculated funded debt to EBITDA ratio (as defined in the Credit Agreement)) which was 2.3% at each of March 31, 2011 and December 31, 2010. The Credit Agreement contains a commitment fee, which ranges between 0.25% to 0.30% based on the funded debt to EBITDA ratio, and was 0.25% at each of March 31, 2011 and December 31, 2010, based on the unused portion of the amount available under the Credit Agreement. All obligations under the Credit Agreement are guaranteed by FWI and certain of its subsidiaries under a guaranty and collateral agreement, and are secured by a first priority lien on certain of FWI and its subsidiaries’ assets (which approximates $144.1 million of current assets and property and equipment as of March 31, 2011) and is without recourse to the Parent Company. FWI is subject to certain compliance provisions including, but not limited to, maintaining certain funded debt and fixed charge coverage ratios, tangible asset concentration levels, and capital expenditure limitations as well as restrictions on indebtedness, guarantees, dividends and other contingent obligations and transactions. Events of default under the Credit Agreement include customary events, such as change of control, breach of covenants or breach of representations and warranties. At March 31, 2011, FWI was in compliance with all covenants under the Credit Agreement.

Considering the outstanding borrowings of $30.0 million, and $1.0 million related to outstanding letters of credit, the unused borrowing capacity under the Credit Agreement was $19.0 million at March 31, 2011, with a limit of $5.0 million of this capacity remaining for the designated borrowers.

In connection with the acquisition of SLM, on February 23, 2011, FWI entered into a consent and waiver agreement as it relates to the Credit Agreement. Pursuant to the consent and waiver agreement, Bank of America, N.A. and Compass Bank consented to the SLM acquisition and waived any default or event of default for certain debt covenants that would arise as a result of the SLM acquisition. FWI funded the cost of the acquisition with $5.0 million in cash and by issuing the Notes to the sellers’ equity holders for $5.3 million ($2.9 million denominated in U.S. dollar and $2.4 million denominated in Australian dollar) payable in two annual installments, which mature on February 23, 2013. All obligations under the Notes are secured by a first priority lien on the assets acquired in the acquisition. At March 31, 2011, $5.4 million was outstanding under the Notes. The Notes bear interest at a fixed rate of 2.5% per annum.

7. Retirement Plan

Two of the 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”). Since the Norwegian Plan represents approximately two percent of the Company’s total pension plan assets and three percent of total pension plan liabilities, only the schedule of net periodic pension cost includes combined amounts from the two plans, while assumption and narrative information relates solely to the U.K. Plan.

Net periodic pension cost for the U.K. and Norwegian Plans includes the following components (in thousands):


	For the Three Months
	Ended March 31,
	2011			2010
Service cost	$	230		$	207
Interest cost		971			900
Expected return on plan assets		(945	)		(882	)
Amortization of prior service cost		(25	)		(23	)
Amortization of net actuarial loss		165			266

Net periodic pension cost	$	396		$	468

The expected long-term rate of return on invested assets is determined based on the weighted average of expected returns on asset investment categories as follows: 6.3% overall, 7.8% for equities and 4.7% for bonds. Estimated annual pension plan contributions are assumed to be consistent with the current expected contribution level of $0.8 million for 2011.

8. Stock-Based Compensation

The Company has stock option plans and agreements which allow for the issuance of stock options, restricted stock awards and stock appreciation rights. For the three months ended March 31, 2011 and 2010, the total compensation cost charged against income and included in selling, general and administrative expenses for stock-based compensation arrangement was $0.2 million and $0.4 million, respectively. The expense for the three months ended March 31, 2010 included $0.2 million associated with accelerated vesting of awards in connection with the retirement of the former Chairman and Chief Executive Officer of the Company. Tax effects from stock-based compensation are insignificant due to the Company’s current domestic tax position. During the first quarter of 2011, the Company granted options to certain employees to purchase 70,000 shares of its common stock with a fair market value of $4.15 per share. The Company uses authorized but unissued shares of common stock for stock option exercises and restricted stock issuances pursuant to the Company’s share-based compensation plan and treasury stock for issuances outside of the plan. As of March 31, 2011, the total unrecognized compensation expense related to stock options and restricted stock awards was $1.9 million and $0.4 million, respectively.

9. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following (in thousands):


	March 31,			December 31,
	2011			2010
Net actuarial loss and prior service credit	$	(13,274	)	$	(12,965	)
Less: deferred tax benefit		3,622			3,538

Net of tax		(9,652	)		(9,427	)
Foreign currency translation adjustment		2,948			1,024

Total accumulated other comprehensive loss	$	(6,704	)	$	(8,403	)

10. Income Taxes

The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in accordance with the provisions of FASB ASC 740,Income Taxes(“ASC 740”). As a result, substantially all domestic federal income taxes, as well as certain state and foreign income taxes, recorded for the three months ended March 31, 2011 and 2010 were fully offset by a corresponding change in valuation allowance. The income tax benefit recorded for the three months ended March 31, 2011 consisted primarily of a valuation allowance change resulting in a deferred tax benefit of $1.2 million related to the SLM acquisition, which was partially offset by income tax expenses in foreign and state jurisdictions in which the Company operates. The income tax expense recorded for the three months ended March 31, 2010 consisted primarily of income tax expenses in foreign and state jurisdictions in which the Company operates.

Income tax expense differs from the expected tax at statutory rates due primarily to the change in valuation allowance for deferred tax assets and different tax rates in the various foreign jurisdictions. Additionally, the aggregate tax expense is not always consistent when comparing periods due to the changing income before income taxes mix between domestic and foreign operations and within the foreign operations. In concluding that a full valuation allowance on domestic federal and certain state and foreign income taxes was required, the Company primarily considered such factors as the history of operating losses and the nature of the deferred tax assets. Interim period income tax expense or benefit is computed at the estimated annual effective tax rate, unless adjusted for specific discrete items as required.

Income tax benefit as a percentage of income before income taxes was approximately 8.6% for the three months ended March 31, 2011 as compared to income tax expense as a percentage of income before income taxes of approximately 30.4% for the three months ended March 31, 2010. Excluding the $1.2 million acquisition related deferred tax benefit noted above, the effective income tax rate for the 2011 period was 23.5%. The remaining change in the income tax rates between periods is related to a lower level of pre-tax income in 2010 as well as changes in the mix of income before income taxes between countries whose income taxes are offset by full valuation allowance and those that are not, and differing statutory tax rates in the countries in which the Company incurs tax liabilities.

In accordance with ASC 740, the Company recognizes the tax benefit from uncertain tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of the position. The tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized non-current tax benefits as part of the income tax provision. The Company incurred no significant interest or penalties for the three months ended March 31, 2011 or 2010. Unrecognized tax benefits at each of March 31, 2011 and December 31, 2010 of $0.8 million for uncertain tax positions related to transfer pricing are included in other liabilities on the consolidated balance sheets and would impact the effective tax rate for certain foreign jurisdictions if recognized.

A reconciliation of the change in the unrecognized tax benefits for the three months ended March 31, 2011 is as follows (in thousands):


Balance at December 31, 2010	$	803
Additions based on tax positions		43

Balance at March 31, 2011	$	846

11. Commitments and Contingencies

The operations of the Company are subject to federal, state and local laws and regulations in the United States and various foreign locations relating to protection of the environment. Although the Company believes its operations are in compliance with applicable environmental regulations, there can be no assurance that costs and liabilities will not be incurred by the Company. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from operations of the Company, could result in costs and liabilities to the Company. The Company has recorded, in other liabilities, an undiscounted reserve for environmental liabilities related to the remediation of site contamination for properties in the United States in the amount of $1.1 million and $1.2 million at March 31, 2011 and December 31, 2010, respectively.

Furmanite America, Inc., a subsidiary of the Company, is involved in disputes with two customers, who are each negotiating with a governmental regulatory agency and claim that the subsidiary failed to provide them with satisfactory services at the customers’ facilities. On April 17, 2009, a customer, INEOS USA LLC, initiated legal action against the subsidiary in the Common Pleas Court of Allen County, Ohio, alleging that the subsidiary and one of its former employees, who performed data services at one of the 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 from 1998 through the second quarter of 2005. 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. The subsidiary believes that it provided the customer with adequate and timely information to support the subsidiary’s work at the customer’s facilities and will vigorously defend against the customer’s claim.

In the first quarter of 2008, a subsidiary of the Company filed an action seeking to vacate a $1.35 million arbitration award related to a sales brokerage agreement associated with a business that the subsidiary sold in 2005. The subsidiary believed that the sales broker was an affiliate of another company that in 2006 settled all of its claims, as well as all of the claims of its affiliates, against the subsidiary. The action to vacate the arbitration award terminated and, in January 2010, the subsidiary paid the full amount of the arbitration award plus accrued interest to the sales broker which was accrued as of December 31, 2009. In separate actions, the subsidiary was seeking to enforce the prior settlement agreement executed by the sales broker’s affiliate and obtain an equitable offset of the arbitration award, however, upon mutual agreement by all parties, these separate actions were dismissed by the court in July 2010.

The Company has contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes, after consulting with counsel, that the ultimate resolution of such contingencies will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.

While the Company cannot make an assessment of the eventual outcome of all of these matters or determine the extent, if any, of any potential uninsured liability or damage, reserves of $1.9 million were recorded in accrued expenses and other current liabilities as of March 31, 2011 and December 31, 2010.

12. Business Segment Data and Geographical Information

An operating segment is defined as a component of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. For financial reporting purposes, the Company operates in a single segment.

The Company provides technical services to an international client base that includes petroleum refineries, chemical plants, pipelines, offshore drilling and production platforms, steel mills, food and beverage processing facilities, power generation, and other flow-process industries.

Geographical areas are the Americas, EMEA and Asia-Pacific. The following geographical area information includes revenues by major service line based on the physical location of the operations (in thousands):


					Asia-
	Americas		EMEA		Pacific		Total
Three months ended March 31, 2011:
On-line services	$	15,945	$	9,470	$	2,509	$	27,924
Off-line services		18,364		10,096		4,040		32,500
Other services		5,918		5,107		1,605		12,630

Total revenues	$	40,227	$	24,673	$	8,154	$	73,054


Three months ended March 31, 2010:
On-line services	$	11,378	$	9,555	$	4,064	$	24,997
Off-line services		15,363		10,636		3,718		29,717
Other services		4,826		6,070		825		11,721

Total revenues	$	31,567	$	26,261	$	8,607	$	66,435

Historically, the Company has not allocated headquarter costs to its operating locations. However, if the headquarter costs had been allocated to all the operating locations based on their respective revenues, the operating income by geographical area based on physical location would have been as follows (in thousands):


							Asia-
	Americas			EMEA			Pacific			Total
Three months ended March 31, 2011:
Operating income¹	$	2,580		$	762		$	483		$	3,825
Allocation of headquarter costs		1,453			(1,096	)		(357	)		—

Adjusted operating income (loss)	$	4,033		$	(334	)	$	126		$	3,825


Three months ended March 31, 2010:
Operating income (loss)²	$	(684	)	$	(636	)	$	1,781		$	461
Allocation of headquarter costs		2,130			(1,610	)		(520	)		—

Adjusted operating income (loss)	$	1,446		$	(2,246	)	$	1,261		$	461


¹		Includes restructuring charges of $0.1 million in EMEA.

²		Includes restructuring charges totaling $0.2 million and $1.7 million in the Americas and EMEA, respectively.

The following geographical area information includes total long-lived assets (which consist of all non-current assets, other than goodwill, indefinite-lived intangible assets and deferred tax assets) based on physical location (in thousands):


	March 31,		December 31,
	2011		2010
Americas	$	20,832	$	17,311
EMEA		12,473		12,092
Asia-Pacific		7,130		3,493

	$	40,435	$	32,896

13. Fair Value of Financial Instruments and Credit Risk

Fair value is defined under FASB ASC 820-10,Fair Value Measurement(“ASC 820-10”), as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820-10 must maximize the use of the observable inputs and minimize the use of unobservable inputs. The

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 Company currently does not have any assets or liabilities that would require valuation under ASC 820-10, except for pension assets. The Company does not have any derivatives or marketable securities. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short period to maturity of these instruments. The estimated fair value of all debt as of March 31, 2011 and December 31, 2010 approximated the carrying value. These fair values were estimated based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimates are not necessarily indicative of the amounts that would be realized in a current market exchange.

The Company provides services to an international client base that includes petroleum refineries, chemical plants, offshore energy production platforms, steel mills, nuclear power stations, conventional power stations, pulp and paper mills, food and beverage processing plants, other flow process facilities. The Company does not believe that it has a significant concentration of credit risk at March 31, 2011, as the Company’s accounts receivable are generated from these business industries with customers located throughout the Americas, EMEA and Asia-Pacific.

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 Quarterly Report on Form 10-Q.

Business Overview

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

The Company provides specialized technical services, including on-line services, which include leak sealing, hot tapping, line stopping, line isolation, composite repair and valve testing. In addition, the Company provides off-line services, which include on-site machining, heat treatment, bolting and valve repair, and other services including heat exchanger design, manufacture and repair, smart shim services, concrete repair and valve and other product manufacturing. These products and services are provided primarily to electric power generating plants, petroleum refineries, which include refineries and offshore drilling rigs (including subsea) and other process industries in the Americas (which includes operations in North America, South America and Latin America), EMEA (which includes operations in Europe, the Middle East and Africa) and Asia-Pacific through Furmanite.

Financial Overview

For the three months ended March 31, 2011, consolidated revenues increased by $6.6 million compared to the three months ended March 31, 2010, primarily related to increases in leak sealing, line stopping and bolting services in the Americas. The Company’s net income for the three months ended March 31, 2011 increased by $3.6 million compared to the three months ended March 31, 2010. The increase in net income was a result of the increase in revenues for the current year three month period, as well as operational improvements realized as a result of the cost reduction initiatives which began in late 2009 and continued throughout 2010.

In the fourth quarter of 2009, the Company committed to a cost reduction initiative, including planned workforce reductions and restructuring of certain functions, in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues. The Company completed the 2009 cost reduction initiative during 2010 with total restructuring costs incurred since its inception of approximately $3.4 million. The Company estimates the effects of this initiative to result in annual cost reductions at historical activity levels of approximately $11.0 million, primarily compensation expenses, which will favorably impact selling, general and administrative expenses.

In the second quarter of 2010, the Company committed to an additional cost reduction initiative, primarily related to the restructuring of certain functions within the Company’s EMEA operations. The Company took specific actions in order to improve the operational and administrative efficiency of its EMEA operations, while providing a structure which will allow for future expansion of operations within the region. The Company expects to incur total costs of approximately $4.0 million in connection with this cost reduction initiative, which are primarily related to severance and benefit costs. As of March 31, 2011, restructuring costs of $3.5 million have been incurred since the inception of this additional cost reduction initiative, with the remaining $0.5 million expected to be incurred during 2011. The Company estimates the effects of this initiative to result in annual cost reductions at historical activity levels of approximately $5.0 million, primarily compensation expenses, of which approximately half will affect operating costs with the other half impacting selling, general and administrative expenses.

As a result of these two initiatives, total restructuring costs negatively impacted operating income and net income by $0.1 million for the three months ended March 31, 2011 and by $1.9 million and $1.6 million, respectively, for the three months ended March 31, 2010.

The Company’s diluted earnings per share for the three months ended March 31, 2011 increased to $0.11 from $0.01 for the three months ended March 31, 2010.

Results of Operations


	For the Three Months
	Ended March 31,
	2011			2010
	(in thousands, except
	per share data)
Revenues	$	73,054		$	66,435
Costs and expenses:
Operating costs (exclusive of depreciation and amortization)		50,443			45,662
Depreciation and amortization expense		1,875			1,549
Selling, general and administrative expense		16,911			18,763

Total costs and expenses		69,229			65,974

Operating income		3,825			461
Interest income and other income (expense), net		122			342
Interest expense		(240	)		(241	)

Income before income taxes		3,707			562
Income tax benefit (expense)		319			(171	)

Net income	$	4,026		$	391

Earnings per share:
Basic	$	0.11		$	0.01
Diluted	$	0.11		$	0.01

Geographical Information


	For the Three Months
	Ended March 31,
	2011			2010
	(in thousands)
Revenues:
Americas	$	40,227		$	31,567
EMEA		24,673			26,261
Asia-Pacific		8,154			8,607

Total revenues		73,054			66,435

Costs and expenses:
Operating costs (exclusive of depreciation and amortization)
Americas		27,104			20,764
EMEA		17,717			19,927
Asia-Pacific		5,622			4,971

Total operating costs (exclusive of depreciation and amortization)		50,443			45,662
Operating costs as a percentage of revenue		69.0	%		68.7	%

Depreciation and amortization expense
Americas, including corporate		1,029			812
EMEA		504			467
Asia-Pacific		342			270

Total depreciation and amortization expense		1,875			1,549
Depreciation and amortization expense as a percentage of revenue		2.6	%		2.3	%

Selling, general and administrative expense
Americas, including corporate		9,514			10,675
EMEA		5,690			6,503
Asia-Pacific		1,707			1,585

Total selling general and administrative expense		16,911			18,763
Selling, general and administrative expense as a percentage of revenue		23.1	%		28.2	%


Total costs and expenses	$	69,229		$	65,974

Geographical areas, based on physical location, are the Americas, EMEA and Asia-Pacific. The following discussion and analysis, as it relates to geographic information, excludes any allocation of headquarter costs to EMEA or Asia-Pacific.

Revenues

For the three months ended March 31, 2011, consolidated revenues increased by $6.6 million, or 9.9%, to $73.0 million, compared to $66.4 million for the three months ended March 31, 2010. Changes related to foreign currency exchange rates favorably impacted revenues by $1.7 million, of which $0.2 million, $0.6 million and $0.9 million were related to favorable impacts in the Americas, EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $4.9 million, or 7.4%, for the three months ended March 31, 2011 compared to the same period in the prior year. This $4.9 million increase in revenues consisted of an increase of $8.5 million in the Americas, which was partially offset by decreases of $2.2 million and $1.4 million in Asia-Pacific and EMEA, respectively. The increase in revenues in the Americas was primarily due to volume increases in on-line services, which included volume increases in leak sealing and line stopping services resulting in an approximate 34% increase in these revenues when compared to the same period in the prior year. In addition, off-line revenues in the Americas increased related to volume increases in bolting services of approximately 9% when compared to the same period in prior year. The decrease in revenues in Asia-Pacific was primarily related to volume decreases in on-line services, which included volume decreases in hot tapping services resulting in an approximate 38% decrease in hot tapping services when compared to the same period in the prior year. The decrease in revenues in EMEA was primarily attributable to decreases within other services,

which related to volume decreases in product and manufacturing revenues and resulted in an approximate 17% decrease in these revenues as compared to the same period in the prior year.

Operating Costs (exclusive of depreciation and amortization)

For the three months ended March 31, 2011, operating costs increased $4.7 million, or 10.3%, to $50.4 million, compared to $45.7 million for the three months ended March 31, 2010. Changes related to foreign currency exchange rates unfavorably impacted costs by $1.1 million, of which $0.1 million, $0.4 million and $0.6 million were related to unfavorable impacts in the Americas, EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, operating costs increased by $3.6 million, or 7.9%, for the three months ended March 31, 2011, compared to the same period in the prior year. This change consisted of a $6.2 million increase in the Americas which was partially offset by a $2.6 million decrease in EMEA. The increase in operating costs in the Americas was primarily attributable to an increase in labor and material costs of approximately 25% and was associated with the increase in revenues when compared to the same period in the prior year. The decrease in EMEA was due to decreases in material and labor costs of 7% associated with the cost reduction initiatives and decreases in revenues. In addition, severance related restructuring costs in EMEA decreased from $0.7 million for the three months ended March 31, 2010 to $41 thousand for the three months ended March 31, 2011. The operating costs in Asia-Pacific remained relatively flat.

Operating costs as a percentage of revenue were 69.0% and 68.7% for the three months ended March 31, 2011 and 2010, respectively. The percentage of operating costs to revenues for the three months ended March 31, 2011 was relatively consistent with the same period in prior year.

Depreciation and Amortization

For the three months ended March 31, 2011, depreciation and amortization expense increased $0.3 million, or 21.0%, when compared to the same period in the prior year. Changes related to foreign currency exchange rates were insignificant for the three months ended March 31, 2011. Depreciation and amortization expense increased due to capital expenditures of approximately $5.7 million placed in service over the twelve-month period ended March 31, 2011.

Depreciation and amortization expense as a percentage of revenue were 2.6% and 2.3% for the three months ended March 31, 2011 and 2010, respectively.

Selling, General and Administrative

For the three months ended March 31, 2011, selling, general and administrative expenses decreased $1.9 million, or 10.1%, to $16.9 million compared to $18.8 million for the three months ended March 31, 2010. Changes related to foreign currency exchange rates unfavorably impacted costs by $0.3 million, of which $0.1 million and $0.2 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, selling, general and administrative expenses decreased $2.2 million, or 11.7%, for the three months ended March 31, 2011, compared to the same period in the prior year. This $2.2 million decrease in selling, general and administrative expenses consisted of $1.2 million, $0.9 million and $0.1 million in decreases in the Americas, EMEA and Asia-Pacific, respectively. The decrease in selling, general and administrative expenses in the Americas was related to reductions in salary and related costs and reductions in professional fees of approximately 6% when compared to the same period in the prior year. In addition, no restructuring costs were incurred in the Americas in the three months ended March 31, 2011 compared to $0.2 million incurred in the same period in the prior year. Decreases in selling, general and administrative expenses in EMEA were primarily a result of reductions in restructuring costs from $1.0 million for the three months ended March 31, 2010 to $47 thousand for the three months ended March 31, 2011. In addition, there were decreases in EMEA’s salary and related costs of approximately 2%, when compared to the same period in the prior year. Decreases in selling, general and administrative expenses in Asia-Pacific were also related to reduction in salary and related costs.

As a result of the above factors, selling, general and administrative expenses as a percentage of revenues decreased to 23.1% for the three months ending March 31, 2011 compared to 28.2% for the three months ended March 31, 2010.

Other Income

Interest Income and Other Income (Expense), Net

For the three months ended March 31, 2011, interest income and other income (expense) decreased $0.2 million when compared to the same period in the prior year. Interest income and other income (expense) primarily relates to foreign currency exchange gains and losses.

Interest Expense

For the three months ended March 31, 2011, consolidated interest expense was consistent with the three months ended March 31, 2010 as average debt and interest rates were comparable for each of the periods then ended.

Income Taxes

The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740,Income Taxes. As a result, substantially all domestic federal income taxes, as well as certain state and foreign income taxes, recorded for the three months ended March 31, 2011 and 2010 were fully reserved with changes offset by a corresponding change in valuation allowance. The income tax benefit recorded for the three months ended March 31, 2011 consisted primarily of a valuation allowance change resulting in a deferred tax benefit of $1.2 million related to the acquisition of Self Leveling Machines (the “SLM acquisition”), which was partially offset by income tax expenses in foreign and state jurisdictions in which the Company operates (see “Liquidity and Capital Resources” for additional information on the SLM acquisition). The income tax expense recorded for the three months ended March 31, 2010 consisted primarily of income taxes due in foreign and state jurisdictions in which the Company operates.

Income tax expense differs from the expected tax at statutory rates due primarily to the change in valuation allowance for deferred tax assets and different tax rates in the various foreign jurisdictions. Additionally, the aggregate tax expense is not always consistent when comparing periods due to the changing income before income taxes mix between domestic and foreign operations and within the foreign operations. In concluding that a full valuation allowance on domestic federal and certain state and foreign income taxes was required, the Company primarily considered factors such as the history of operating losses and the nature of the deferred tax assets. Interim period income tax expense or benefit is computed at the estimated annual effective tax rate, unless adjusted for specific discrete items as required.

Liquidity and Capital Resources

The Company’s liquidity and capital resources requirements include the funding of working capital needs, the funding of capital investments and the financing of internal growth.

Net cash used in operating activities was $25 thousand for the three months ended March 31, 2011 compared to net cash used in operating activities of $1.9 million for the three months ended March 31, 2010. The decrease in net cash used in operating activities was primarily due to a $3.6 million increase in net income for the three months ended March 31, 2011 due to higher revenues and lower restructuring costs as compared to the same period in prior year. The cash impact increase in net income was partially offset by non-cash items, including a $1.2 million deferred tax benefit recorded in connection with the SLM acquisition, and differences in changes in working capital requirements, which decreased cash flows by $5.2 million for the three months ended March 31, 2011 compared to a decrease of approximately $4.5 million in the three months ended March 31, 2010.

Net cash used in investing activities increased to $4.6 million for the three months ended March 31, 2011 from $2.4 million for the three months ended March 31, 2010 primarily due to $3.9 million of cash paid, net of cash acquired of $1.1 million, in connection with the SLM acquisition. This increase in cash used relating to the SLM acquisition is partially offset by a reduction in capital

expenditures from $2.4 million for the three months ended March 31, 2010 to $0.8 million for the three months ended March 31, 2011. The decrease in capital expenditures compared to the prior year is due to the timing of capital projects in the current year.

Consolidated capital expenditures for the calendar year 2011 have been budgeted at $11.0 million to $12.0 million. Such expenditures, however, will depend on many factors beyond the Company’s control, including, without limitation, demand for services as well as domestic and foreign government regulations. No assurance can be given that required capital expenditures will not exceed anticipated amounts during 2011 or thereafter. Capital expenditures during the year are expected to be funded from existing cash and anticipated cash flows from operations.

Net cash used in financing activities for the three months ended March 31, 2011 was consistent with the three months ended March 31, 2010. Financing activities during the current and prior year periods consisted of principal payments on long-term capital leases.

While the Company’s operating results for the three months ended March 31, 2011 have improved as compared to the same period in the prior year, the worldwide economy, including the markets in which the Company operates, continues, in varying degrees to remain sluggish, and as such, the Company believes that the risks to its business and its customers remain heightened. Lower levels of liquidity and capital adequacy affecting lenders, increases in defaults and bankruptcies by customers and suppliers, and volatility in credit and equity markets, as observed in this economic environment, could continue to have a negative impact on the Company’s business, operating results, cash flows or financial condition in a number of ways, including reductions in revenues and profits, increased bad debts, and financial instability of suppliers and insurers.

On August 4, 2009, Furmanite Worldwide, Inc. (“FWI”), a wholly owned subsidiary of the Parent Company, and certain foreign subsidiaries of FWI (the “designated borrowers”) entered into a credit agreement dated July 31, 2009 with a banking syndicate comprising Bank of America, N.A. and Compass Bank (the “Credit Agreement”). The Credit Agreement, which matures on January 31, 2013, provides a revolving credit facility of up to $50.0 million. A portion of the amount available under the Credit Agreement (not in excess of $20.0 million) is available for the issuance of letters of credit. In addition, a portion of the amount available under the Credit Agreement (not in excess of $5.0 million in the aggregate) is available for swing line loans to FWI. The loans outstanding under the Credit Agreement may not exceed $35.0 million in the aggregate to the designated borrowers.

At each of March 31, 2011 and December 31, 2010, $30.0 million was outstanding under the Credit Agreement. Borrowings under the Credit Agreement bear interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate at the option of the borrower, including a margin above such rates, and subject to an adjustment based on a calculated funded debt to EBITDA ratio (as defined in the Credit Agreement)) which was 2.3% at each of March 31, 2011 and December 31, 2010. The Credit Agreement contains a commitment fee which ranges between 0.25% to 0.30% based on the funded debt to EBITDA ratio, and was 0.25% at each of March 31, 2011 and December 31, 2010, based on the unused portion of the amount available under the Credit Agreement. All obligations under the Credit Agreement are guaranteed by FWI and certain of its subsidiaries under a guaranty and collateral agreement, and are secured by a first priority lien on certain of FWI and its subsidiaries’ assets (which approximates $144.1 million of current assets and property and equipment as of March 31, 2011) and is without recourse to the Parent Company. FWI is subject to certain compliance provisions including, but not limited to, maintaining certain funded debt and fixed charge coverage ratios, tangible asset concentration levels, and capital expenditure limitations as well as restrictions on indebtedness, guarantees, dividends and other contingent obligations and transactions. Events of default under the Credit Agreement include customary events, such as change of control, breach of covenants or breach of representations and warranties. At March 31, 2011, FWI was in compliance with all covenants under the Credit Agreement.

On February 23, 2011, FWI entered into a Stock Purchase Agreement to acquire 100% of the outstanding stock of Self Leveling Machines, Inc. and a subsidiary of FWI entered into an Asset Purchase Agreement to acquire substantially all of the material operating and intangible assets of Self Levelling Machines Pty. Ltd. for total consideration of $9.2 million, net of cash acquired of $1.1 million. SLM provides large scale on-site machining, which includes engineering, fabrication and execution of highly-specialized machining solutions for large-scale equipment or operations.

acquisition. FWI funded the cost of the acquisition with $5.0 million in cash and by issuing notes payable (the “Notes”) to the sellers’ equity holders for $5.3 million ($2.9 million denominated in U.S. dollar and $2.4 million denominated in Australian dollar) payable in two annual installments, which mature February 23, 2013. All obligations under the Notes are secured by a first priority lien on the assets acquired in the acquisition. At March 31, 2011, $5.4 million was outstanding under the Notes. The Notes bear interest at a fixed rate of 2.5% per annum.

At the end of 2009 and in the first half of 2010, the Company committed to cost reduction initiatives in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues. As of March 31, 2011, the costs incurred since the inception of these cost reduction initiatives totaled approximately $6.9 million. During the three months ended March 31, 2011, the Company incurred restructuring charges of $0.1 million related to the 2010 initiative and made cash payments of $0.7 million related to both the 2009 and 2010 initiatives. As of March 31, 2011, the remaining reserve associated with these initiatives totaled $1.0 million with estimated additional charges to be incurred of approximately $0.5 million, all of which are expected to require cash payments. Total workforce reductions, which began in the fourth quarter of 2009, included terminations for 165 employees, which included reductions of 31 employees in the Americas, 133 employees in EMEA, and one employee in Asia-Pacific.

The Company does not anticipate paying any dividends as it believes investing earnings back into the Company will provide a better long-term return to stockholders in increased per share value. The Company believes that funds generated from operations, together with existing cash and available credit under the Credit Agreement, will be sufficient to finance current operations, including the Company’s cost reduction initiative obligations, planned capital expenditure requirements and internal growth for the foreseeable future.

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant policies are presented in the Notes to the Consolidated Financial Statements and under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Critical accounting policies are those that are most important to the portrayal of the Company’s financial position and results of operations. These policies require management’s most difficult, subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting policies and estimates, for which no significant changes have occurred in the three months ended March 31, 2011, include revenue recognition, allowance for doubtful accounts, goodwill, intangible and long-lived assets, stock-based compensation, income taxes, defined benefit pension plan, contingencies, and exit or disposal obligations. Critical accounting policies are discussed regularly, at least quarterly, with the Audit Committee of the Company’s Board of Directors.

Revenue Recognition

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

Revenues are based primarily on time and materials. Substantially all projects are generally short term in nature. Revenues are recognized when persuasive evidence of an arrangement exists, services to customers have been rendered or when products have been delivered and risk of ownership has passed to the customer, the selling price is fixed or determinable and collectability is reasonably assured. Revenues are recorded, net of sales tax. The Company provides limited warranties to customers, depending upon the service performed.

Allowance for Doubtful Accounts

Credit is extended to customers based on evaluation of the customer’s financial condition and generally collateral is not required. Accounts receivable outstanding longer than contractual payment terms are considered past due. The Company regularly evaluates and adjusts accounts receivable as doubtful based on a combination of write-off history, aging analysis and information available on specific accounts. The Company writes off accounts receivable when they become uncollectible. Any payments subsequently received on such receivables are credited to the allowance in the period the payment is received.

Goodwill, Intangible and Long-Lived Assets

The Company accounts for goodwill and other intangible assets in accordance with the provisions of FASB ASC 350,Intangibles — Goodwill and Other. Under FASB ASC 350, intangible assets with lives restricted by contractual, legal or other means are amortized over their useful lives. At March 31, 2011 and December 31, 2010, the Company had no significant intangible assets subject to amortization under FASB ASC 350. Goodwill and other intangible assets not subject to amortization are tested for impairment annually (in the fourth quarter of each calendar year), or more frequently if events or changes in circumstances indicate that the assets might be impaired. Examples of such events or circumstances include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, or a loss of key personnel.

FASB ASC 350 requires a two-step process for testing goodwill impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. A reporting unit is an operating segment or one level below an operating segment (referred to as a component). Two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. The Company has one reporting unit for the purpose of testing goodwill impairment. Second, if an impairment is indicated, the implied fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of the carrying value over the implied fair value.

The Company uses market capitalization as the basis for its measurement of fair value as management considers this approach the most meaningful measure, considering the quoted market price as providing the best evidence of fair value. In performing the analysis, the Company uses the stock price on December 31 of each year as the valuation date. On December 31, 2010, Furmanite’s fair value substantially exceeded its carrying value.

The Company accounts for long-lived assets in accordance with the provisions of FASB ASC 360,Property, Plant, and Equipment. Under FASB ASC 360, the Company reviews long-lived assets, which consist of finite-lived intangible assets and property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Factors that may affect recoverability include changes in planned use of equipment, closing of facilities and discontinuance of service lines. Property and equipment to be held and used is reviewed at least annually for possible impairment. The Company’s impairment review is based on an estimate of the undiscounted cash flow at the lowest level for which identifiable cash flows exist. Impairment occurs when the carrying value of the assets exceeds the estimated future undiscounted cash flows generated by the asset and the impairment is viewed as other than temporary. When impairment is indicated, an impairment charge is recorded for the difference between the carrying value of the asset and its fair market value. Depending on the asset, fair market value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition.

Stock-Based Compensation

All stock-based compensation is recognized as an expense in the financial statements and such costs are measured at the fair value of the award at the date of grant. The fair value of stock-based payment awards on the date of grant as determined by the Black-Scholes model is affected by the Company’s stock price on the date of the grant as well as other assumptions. Assumptions utilized in the fair value calculations include the expected stock price volatility over the term of the awards (estimated using the historical volatility of the Company’s stock price), the risk free interest rate (based on the U.S. Treasury Note rate over the expected term of the option), the dividend yield (assumed to be zero, as the Company has not paid, nor anticipates paying, any cash dividends in the foreseeable future), and employee stock option exercise behavior and forfeiture assumptions (based on historical experience and other relevant factors).

Income Taxes

Deferred tax assets and liabilities result from temporary differences between the U.S. GAAP and tax treatment of certain income and expense items. The Company must assess and make estimates regarding the likelihood that the deferred tax assets will be recovered. To the extent that it is determined the deferred tax assets will not be recovered, a valuation allowance must be established for such assets. In making such a determination, the Company must take into account positive and negative evidence including projections of future taxable income and assessments of potential tax planning strategies.

The Company recognizes the tax benefit from uncertain tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of the position. The tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. Uncertain tax positions in certain foreign jurisdictions would not impact the effective foreign tax rate because unrecognized non-current tax benefits are offset by the foreign net operating loss carryforwards, which are fully reserved. The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized non-current tax benefits as part of the income tax provision.

Defined Benefit Pension Plan

Pension benefit costs and liabilities are dependent on assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, expected investment return on plan assets, mortality rates and retirement rates. These rates are reviewed annually and adjusted to reflect current conditions. These rates are determined based on reference to yields. The compensation increase rate is based on historical experience. The expected return on plan assets is derived from detailed periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks (standard deviations) and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return. Mortality and retirement rates are based on actual and anticipated plan experience. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While the Company believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect pension and postretirement obligation and future expense.

Contingencies

Environmental

Liabilities are recorded when site restoration or environmental remediation and cleanup obligations are either known or considered probable and can be reasonably estimated. Recoveries of environmental costs through insurance, indemnification arrangements or other sources are recognized when such recoveries become certain.

The Company capitalizes environmental costs only if the costs are recoverable and the costs extend the life, increase the capacity, or improve the safety or efficiency of property owned by the Company as compared with the condition of that property when originally constructed or acquired, or if the costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations or activities and the costs improve the property compared with its condition when constructed or acquired. All other environmental costs are expensed.

Other

The Company establishes a liability for all other loss contingencies, when information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated.

Exit or Disposal Obligations

In the fourth quarter of 2009 and in the first half of 2010, the Company committed to cost reduction initiatives, including planned workforce reductions and restructuring of certain functions. The Company has taken these specific actions in order to more strategically align its operating, selling, general and administrative costs relative to revenues. The Company has recorded expenses related to these cost reduction initiatives for severance, lease cancellations, and other restructuring costs in accordance with FASB ASC 420-10, “Exit or Disposal Cost Obligations” and FASB ASC 712-10,“Nonretirement Postemployment Benefits.”

Under FASB ASC 420-10, costs associated with restructuring activities are generally recognized when they are incurred. In the case of leases, the expense is estimated and accrued when the property is vacated. In addition, post-employment benefits accrued for workforce reductions related to restructuring activities are accounted for under FASB ASC 712-10.A liability for post-employment benefits is generally recorded when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated. The Company continually evaluates the adequacy of the remaining liabilities under its restructuring initiatives. Although the Company believes that these estimates accurately reflect the costs of its

restructuring plans, actual results may differ, thereby requiring the Company to record additional provisions or reverse a portion of such provisions.

New Accounting Pronouncements

Off-Balance Sheet Transactions

The Company was not a party to any off-balance sheet transactions at March 31, 2011 or December 31, 2010, or for the three months ended March 31, 2011.

Inflation and Changing Prices

The Company does not operate or conduct business in hyper-inflationary countries nor enter into long-term supply contracts that may impact margins due to inflation. Changes in prices of goods and services are reflected on proposals, bids or quotes submitted to customers.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s principal market risk exposures (i.e., the risk of loss arising from the adverse changes in market rates and prices) are to changes in interest rates on the Company’s debt and investment portfolios and fluctuations in foreign currency.

The Company centrally manages its debt, considering investment opportunities and risks, tax consequences and overall financing strategies. Based on the amount of variable rate debt, $30.0 million at March 31, 2011, an increase in interest rates by one hundred basis points would increase annual interest expense by approximately $0.3 million.

A significant portion of the Company’s business is exposed to fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of the foreign operations of the Company in Australia, Bahrain, Belgium, Canada, China, Denmark, France, Germany, Malaysia, The Netherlands, New Zealand, Nigeria, Norway, Singapore, Sweden and the United Kingdom. Overall volatility in currency exchange rates has increased over the past several years. Currencies in the first quarter of 2011 were not as volatile as in recent periods, as foreign currencies exchange rate changes, primarily the Euro, the Australian Dollar and the British Pound, relative to the U.S. dollar resulted in a favorable impact on the Company’s U.S. dollar reported revenues for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010. The revenue impact was somewhat mitigated with similar exchange effects on operating costs thereby reducing the exchange rate effect on operating income. The Company does not use interest rate or foreign currency rate hedges.

Based on the three months ended March 31, 2011, foreign currency-based revenues and operating income of $35.3 million and $2.1 million, respectively, a ten percent depreciation in all applicable foreign currencies would result in a decrease in revenues and operating income of $3.2 million and $0.2 million, respectively.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s principal executive officer and principal financial officer have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2011. Based on that evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the

Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2011, the most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

FURMANITE CORPORATION AND SUBSIDIARIES

PART II — Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors

During the quarter ended March 31, 2011, there were no material changes to the risk factors reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 6. Exhibits


	3.1			Restated Certificate of Incorporation of the Registrant, dated September 26, 1979, incorporated by reference herein to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-16.

	3.2			Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated April 30, 1981, incorporated by reference herein to Exhibit 3.2 to the Registrant’s Form 10-K for the year ended December 31, 1981.

	3.3			Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated May 28, 1985, incorporated by reference herein to Exhibit 4.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 1985.

	3.4			Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated September 17, 1985, incorporated by reference herein to Exhibit 4.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 1985.

	3.5			Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated July 10, 1990, incorporated by reference herein to Exhibit 3.5 to the Registrant’s Form 10-K for the year ended December 31, 1990.

	3.6			Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated September 21, 1990, incorporated by reference herein to Exhibit 3.5 to the Registrant’s Form 10-Q for the quarter ended September 30, 1990.

	3.7			Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated August 8, 2001, incorporated by reference herein to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 22, 2001.

	3.8			By-laws of the Registrant, as amended and restated June 14, 2007, filed as Exhibit 3.8 to the Registrant’s 10-K for the year then ended December 31, 2007, which exhibit is hereby incorporated by reference.

	4.1			Certificate of Designation, Preferences and Rights related to the Registrant’s Series B Junior Participating Preferred Stock, filed as Exhibit 4.2 to the Registrant’s 10-K for the year ended December 31, 2008, which exhibit is incorporated herein by reference.

	4.2			Rights Agreement, dated as of April 15, 2008, between the Registrant and The Bank of New York Trust Company, N.A., a national banking association, as Rights Agent, which includes as exhibits, the Form of Rights Certificate and the Summary of Rights to Purchase Stock, filed as Exhibit 4.1 to the Registrant’s Form 8-A/A filed on April 18, 2008, which exhibit is incorporated herein by reference.

	4.3			Letters to stockholders of the Registrant, dated April 19, 2008 (incorporated by reference herein to Exhibit 4.2 to the Registrant’s Form 8-A/A filed on April 18, 2008).

	31.1*			Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011.

	31.2*			Certification of Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011.

	32.1*			Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011.

	32.2*			Certification of Principal Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of May 9, 2011.


*		Filed herewith.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FURMANITE CORPORATION (Registrant)
	/s/ ROBERT S. MUFF
	Robert S. Muff
	Chief Accounting Officer (Principal Financial and Accounting Officer)

Date: May 9, 2011

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Bad

Furmanite Inactive 10-Q2011 Q1 Quarterly report

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