Furmanite 10-Q 2011 Q2 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 June 30, 2011

OR

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

for the transition period from                                                            to                                                            

Commission File Number 001-05083

FURMANITE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	74-1191271
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
2435 North Central Expressway
Suite 700
Richardson, Texas	75080
(Address of principal executive offices)	(Zip Code)

(972) 699-4000
(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).þ 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 37,092,575 shares of the registrant’s common stock outstanding as of August 2, 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 June 30, 2011 (unaudited) and December 31, 2010		4
Consolidated Income Statements for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)		5
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 (unaudited) and for the Year Ended December 31, 2010		6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)		7
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 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		20
Item 3. Quantitative and Qualitative Disclosure About Market Risk		31
Item 4. Controls and Procedures		31
PART II. Other Information
Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 6. Exhibits		33
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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.

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PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	June 30,			December 31,
	2011			2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	30,855		$	37,170
Accounts receivable, trade (net of allowance for doubtful accounts of $1,500 and $ 1,497 as of June 30, 2011 and December 31, 2010, respectively)		74,014			63,630
Inventories, net of reserve:
Raw materials and supplies		18,506			17,375
Work-in-process		7,495			6,906
Finished goods		167			85
Prepaid expenses and other current assets		5,769			5,951
Total current assets		136,806			131,117
Property and equipment		83,204			73,969
Less: accumulated depreciation and amortization		(48,015	)		(43,249	)
Property and equipment, net		35,189			30,720
Goodwill		14,538			13,148
Deferred tax assets		2,750			2,872
Intangible and other assets		8,168			4,244
Total assets	$	197,451		$	182,101
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	2,727		$	76
Accounts payable		17,634			17,815
Accrued expenses and other current liabilities		21,846			24,488
Income taxes payable		906			557
Total current liabilities		43,113			42,936
Long-term debt, non-current		32,855			30,085
Net pension liability		8,591			8,432
Other liabilities		2,598			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; 41,070,216 and 40,925,619 shares issued as of June 30, 2011 and December 31, 2010, respectively		4,758			4,745
Additional paid-in capital		132,567			132,132
Accumulated deficit		(3,201	)		(12,373	)
Accumulated other comprehensive loss		(5,817	)		(8,403	)
Treasury stock, at cost (4,008,963 shares as of June 30, 2011 and December 31, 2010)		(18,013	)		(18,013	)
Total stockholders’ equity		110,294			98,088
Total liabilities and stockholders’ equity	$	197,451		$	182,101

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

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FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share data)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Revenues	$	83,009		$	77,513		$	156,063		$	143,948
Costs and expenses:
Operating costs (exclusive of depreciation and amortization)		56,425			51,922			106,868			97,584
Depreciation and amortization expense		2,198			1,572			4,073			3,121
Selling, general and administrative expense		17,779			18,493			34,690			37,256
Total costs and expenses		76,402			71,987			145,631			137,961
Operating income		6,607			5,526			10,432			5,987
Interest income and other income (expense), net		120			(246	)		242			96
Interest expense		(255	)		(241	)		(495	)		(482	)
Income before income taxes		6,472			5,039			10,179			5,601
Income tax expense		(1,326	)		(1,479	)		(1,007	)		(1,650	)
Net income	$	5,146		$	3,560		$	9,172		$	3,951
Earnings per common share:
Basic	$	0.14		$	0.10		$	0.25		$	0.11
Diluted	$	0.14		$	0.10		$	0.25		$	0.11
Weighted-average number of common and common equivalent shares used in computing net income per common share:
Basic		36,971			36,734			36,948			36,711
Diluted		37,328			36,932			37,296			36,871

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

5

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 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		–		–		–		–			9,172			–			–			9,172
Stock-based compensation and stock option exercises		144,597		–		13		435			–			–			–			448
Change in pension net actuarial loss and prior service credit, net of tax		–		–		–		–			–			(112	)		–			(112	)
Foreign currency translation adjustment		–		–		–		–			–			2,698			–			2,698
Balances at June 30, 2011		41,070,216		4,008,963	$	4,758	$	132,567		$	(3,201	)	$	(5,817	)	$	(18,013	)	$	110,294

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

6

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Six Months
	Ended June 30,
	2011			2010
Operating activities:
Net income	$	9,172		$	3,951
Reconciliation of net income to net cash (used in) provided by operating activities:
Depreciation and amortization		4,073			3,121
Provision for doubtful accounts		216			327
Deferred income taxes		(1,259	)		(86	)
Stock-based compensation expense		322			494
Other, net		320			441
Changes in operating assets and liabilities:
Accounts receivable		(10,057	)		(6,850	)
Inventories		(2,469	)		1,842
Prepaid expenses and other current assets		326			1,316
Accounts payable		(134	)		(496	)
Accrued expenses and other current liabilities		(2,715	)		(3,142	)
Income taxes payable		376			(352	)
Other, net		(134	)		(47	)
Net cash (used in) provided by operating activities		(1,963	)		519
Investing activities:
Capital expenditures		(1,579	)		(3,451	)
Acquisition of assets and business, net of cash acquired of $971 in 2011		(4,029	)		(350	)
Proceeds from sale of assets		105			195
Net cash used in investing activities		(5,503	)		(3,606	)
Financing activities:
Payments on debt		(69	)		(99	)
Issuance of common stock		126			–
Net cash provided by (used in) financing activities		57			(99	)
Effect of exchange rate changes on cash		1,094			(1,094	)
Decrease in cash and cash equivalents		(6,315	)		(4,280	)
Cash and cash equivalents at beginning of period		37,170			36,117
Cash and cash equivalents at end of period	$	30,855		$	31,837
Supplemental cash flow information:
Cash paid for interest	$	357		$	400
Cash paid for income taxes, net of refunds received	$	1,612		$	1,577
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.

7

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)
(Unaudited)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2011		2010			2011			2010
Net income	$	5,146	$	3,560		$	9,172		$	3,951
Other comprehensive income (loss):
Change in pension net actuarial loss and prior service credit, net of tax		113		205			(112	)		1,137
Foreign currency translation adjustments		774		(1,356	)		2,698			(3,556	)
Total other comprehensive income (loss)		887		(1,151	)		2,586			(2,419	)
Comprehensive income	$	6,033	$	2,409		$	11,758		$	1,532

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

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FURMANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 or six months ended June 30, 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 June 30, 2011 and December 31, 2010, respectively. The cost of 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.

In June 2011, the FASB issued Accounting Standards Update 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs(“ASU 2011-04”). ASU 2011-04 clarifies the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 provides further clarification on the: (1) application of the highest and best use and valuation premise concepts, (2) fair value measurement of an instrument classified in a reporting entity’s shareholders’ equity, and (3) disclosure of unobservable inputs used in Level 3 fair value measurements. ASU 2011-04 also changes how fair value is measured for financial instruments that are managed within a portfolio and how premiums and discounts are applied in measuring fair value. In addition to the clarification of Level 3 disclosures, ASU 2011-04 requires additional disclosures for fair value measurements as it

9

relates to the following: (1) the valuation process and sensitivity of changes in unobservable inputs, (2) a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and (3) the categorization by level of the fair value hierarchy for items that are not measured at fair value but for which the fair value is required to be disclosed. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011. The Company does not expect a material impact from the adoption of this guidance on the Company’s consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011-05,Presentation of Comprehensive Income(“ASU 2011-05”). ASU 2011-05 amends existing guidance by allowing only the following two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement or (2) in two separate but consecutive financial statements. In addition, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, the Company’s option to present components of other comprehensive income either net of related tax effects or before related tax effects, nor does it affect how earnings per share is calculated or presented. ASU 2011-05 requires retrospective application, and it is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The Company anticipates the adoption of this guidance will change the presentation and provide additional detail on certain consolidated financial statements, but will not have any other material impact.

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 $9.3 million, net of cash acquired of $1.0 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. During the second quarter of 2011, goodwill increased by $0.2 million resulting from adjustments to the fair value measurement of acquired net assets. 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	$	971
Accounts receivable		224
Prepaid expenses and other current assets		46
Property and equipment		5,024
Goodwill1		1,390
Intangible and other assets2		4,135
Accrued expenses and other current liabilities		(100	)
Deferred tax liabilities		(1,390	)
Fair value of net assets acquired	$	10,300

¹ Goodwill consists of intangible assets that do not qualify for separate recognition and is not 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.

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The SLM acquisition was not material to the Company’s financial position and results of operations, therefore, SLM’s pro forma results would not have a material 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				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Net income	$	5,146	$	3,560	$	9,172	$	3,951
Basic weighted-average common shares outstanding		36,971		36,734		36,948		36,711
Dilutive effect of common stock equivalents		357		198		348		160
Diluted weighted-average common shares outstanding		37,328		36,932		37,296		36,871
Earnings per share:
Basic	$	0.14	$	0.10	$	0.25	$	0.11
Dilutive	$	0.14	$	0.10	$	0.25	$	0.11
Stock options excluded from diluted weighted-average common shares outstanding because their inclusion would have an anti-dilutive effect:		328		515		319		560

4. Accrued Expenses and Other Current Liabilities

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

	June 30,		December 31,
	2011		2010
Compensation and benefits1	$	13,672	$	15,130
Value added tax payable		1,957		1,387
Estimated potential uninsured liability claims		1,521		1,886
Taxes other than income		1,242		1,052
Professional, audit and legal fees		854		1,088
Rent		332		327
Customer deposit		287		615
Other employee related expenses		247		550
Interest		64		20
Other2		1,670		2,433
	$	21,846	$	24,488

¹ Includes restructuring accruals of $0.3 million and $1.1 million as of June 30, 2011 and December 31, 2010, respectively.

² Includes restructuring accruals of $0.5 million at each of June 30, 2011 and December 31, 2010, respectively.

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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 of approximately $3.4 million. For the three months ended June 30, 2010, restructuring costs of $0.3 million were incurred and are included in selling, general and administrative expenses. For the six months ended June 30, 2010, restructuring costs of $0.7 million and $1.4 million were incurred and are included in operating costs and selling, general and administrative expenses, respectively. There was minimal activity during the first half of 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. At each of the three and six months ended June 30, 2011, restructuring costs of $0.1 million are included in operating costs, respectively. No restructuring costs were included in operating costs for this initiative for the three or six months ended June 30, 2010. At each of the three and six months ended June 30, 2011, restructuring costs incurred of $0.1 million are included in selling, general and administrative expenses, respectively. For each of the three and six months ended June 30, 2010, restructuring costs incurred of $0.6 million are included in selling, general and administrative expenses.

The total restructuring costs estimated to be incurred in connection with this cost reduction initiative are $4.0 million. As of June 30, 2011, the costs incurred since the inception of this cost reduction initiative totaled approximately $3.6 million, with the remaining $0.4 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 six months ended June 30, 2011, is as follows (in thousands):

	Reserve at								Foreign currency		Reserve at
	December 31,2010		Charges			Cash payments			adjustments		June 30, 2011
2009 Initiative
Severance and benefit costs	$	107	$	–		$	(110	)	$	3	$	–
Lease termination costs		125		–			–			5		130
Other restructuring costs		9		(9	)		–			–		–
2010 Initiative
Severance and benefit costs		969		211			(917	)		54		317
Lease termination costs		277		19			(30	)		25		291
Other restructuring costs		90		24			(28	)		7		93
	$	1,577	$	245		$	(1,085	)	$	94	$	831

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

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Severance and benefit costs	$	127	$	692	$	211	$	1,878
Lease termination costs		21		89		19		405
Other restructuring costs		9		89		15		441
	$	157	$	870	$	245	$	2,724

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

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Americas	$	–	$	180	$	–	$	367
EMEA		157		690		245		2,357
	$	157	$	870	$	245	$	2,724

Total workforce reductions in which severance costs were incurred 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):

	June 30,			December 31,
	2011			2010
Borrowings under the revolving credit facility (the “Credit Agreement”)	$	30,000		$	30,000
Capital leases		96			161
Notes payable (the “Notes”)		5,486			–
Total long-term debt		35,582			30,161
Less: current portion of long-term debt		(2,727	)		(76	)
Total long-term debt, non-current	$	32,855		$	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 June 30, 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 2.2% at June 30, 2011 and 2.3% at 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 June 30, 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

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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 $148.2 million of current assets and property and equipment as of June 30, 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 June 30, 2011, FWI was in compliance with all covenants under the Credit Agreement.

Considering the outstanding borrowings of $30.0 million, and $1.1 million related to outstanding letters of credit, the unused borrowing capacity under the Credit Agreement was $18.9 million at June 30, 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 June 30, 2011, $5.5 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						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Service cost	$	231		$	198		$	461		$	404
Interest cost		965			879			1,936			1,779
Expected return on plan assets		(939	)		(862	)		(1,884	)		(1,745	)
Amortization of prior service cost		(25	)		(23	)		(50	)		(46	)
Amortization of net actuarial loss		164			260			329			526
Net periodic pension cost	$	396		$	452		$	792		$	918

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, restricted stock units and stock appreciation rights. For the three and six months ended June 30, 2011, the total compensation cost charged against income and included in selling, general and administrative expenses for stock-based compensation arrangement was $0.1 million and $0.3 million, respectively, and $0.1 million and $0.5 million for the three and six months ended June 30, 2010. The expense for the six months ended June 30, 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.

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During the three months ended June 30, 2011, the Company granted $0.7 million in restricted stock units. The Company uses authorized but unissued shares of common stock for stock option exercises and restricted stock issuances pursuant to the Company’s share-based compensation plan and treasury stock for issuances outside of the plan. As of June 30, 2011, the total unrecognized compensation expense related to stock options and restricted stock was $1.6 million and $1.1 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):

	June 30,			December 31,
	2011			2010
Net actuarial loss and prior service credit	$	(13,119	)	$	(12,965	)
Less: deferred tax benefit		3,580			3,538
Net of tax		(9,539	)		(9,427	)
Foreign currency translation adjustment		3,722			1,024
Total accumulated other comprehensive loss	$	(5,817	)	$	(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 and six months ended June 30, 2011 and 2010 were fully offset by a corresponding change in valuation allowance. Income tax expense recorded for the three and six months ended June 30, 2011 consisted of income tax expenses in foreign and state jurisdictions in which the Company operates, with the six months ended June 30, 2011 partially offset by a valuation allowance change resulting in a deferred tax benefit of $1.2 million related to the SLM acquisition. Income tax expense recorded for the three and six months ended June 30, 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 expense as a percentage of income before income taxes was approximately 9.9% and 29.5% for the six months ended June 30, 2011 and 2010, respectively. For the three months ended June 30, 2011 and 2010 income tax expense as a percentage of income before income taxes was approximately 20.5% and 29.4%, respectively. Excluding the $1.2 million acquisition related deferred tax benefit noted above, the effective income tax rate for the six months ended June 30, 2011 was 21.9%. The remaining change in the income tax rates between periods is related to changes in the mix of income before income taxes between countries whose income taxes are offset by full valuation allowance and those that are not, 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 and six months ended June 30, 2011 and 2010. Unrecognized tax benefits at June 30, 2011 and December 31, 2010 of $0.9 million and $0.8 million, respectively, for uncertain tax positions related to transfer pricing are included in other liabilities on the consolidated balance sheets and would impact the effective tax rate for certain foreign jurisdictions if recognized.

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A reconciliation of the change in the unrecognized tax benefits for the six months ended June 30, 2011 is as follows (in thousands):

Balance at December 31, 2010	$	803
Additions based on tax positions		114
Balance at June 30, 2011	$	917

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 June 30, 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 $1.5 million and $1.9 million were recorded in accrued expenses and other current liabilities as of June 30, 2011 and December 31, 2010, respectively.

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.

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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 June 30, 2011:
On-line services	$	17,054	$	10,696	$	3,875	$	31,625
Off-line services		17,401		15,593		4,684		37,678
Other services		6,488		5,977		1,241		13,706
Total revenues	$	40,943	$	32,266	$	9,800	$	83,009
Three months ended June 30, 2010:
On-line services	$	12,359	$	8,049	$	4,174	$	24,582
Off-line services		15,678		14,654		6,863		37,195
Other services		9,513		5,143		1,080		15,736
Total revenues	$	37,550	$	27,846	$	12,117	$	77,513
Six months ended June 30, 2011:
On-line services	$	32,999	$	20,166	$	6,384	$	59,549
Off-line services		35,765		25,689		8,724		70,178
Other services		12,406		11,084		2,846		26,336
Total revenues	$	81,170	$	56,939	$	17,954	$	156,063
Six months ended June 30, 2010:
On-line services	$	23,737	$	17,604	$	8,238	$	49,579
Off-line services		31,041		25,290		10,581		66,912
Other services		14,339		11,213		1,905		27,457
Total revenues	$	69,117	$	54,107	$	20,724	$	143,948

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

	Americas			EMEA			Asia- Pacific			Total
Three months ended June 30, 2011:
Operating income1	$	2,321		$	3,299		$	987		$	6,607
Allocation of headquarter costs		2,058			(1,582	)		(476	)		—
Adjusted operating income	$	4,379		$	1,717		$	511		$	6,607
Three months ended June 30, 2010:
Operating income2	$	515		$	1,569		$	3,442		$	5,526
Allocation of headquarter costs		2,187			(1,536	)		(651	)		—
Adjusted operating income	$	2,702		$	33		$	2,791		$	5,526
Six months ended June 30, 2011:
Operating income1	$	4,901		$	4,061		$	1,470		$	10,432
Allocation of headquarter costs		3,511			(2,678	)		(833	)		—
Adjusted operating income	$	8,412		$	1,383		$	637		$	10,432
Six months ended June 30, 2010:
Operating income (loss)3	$	(169	)	$	933		$	5,223		$	5,987
Allocation of headquarter costs		4,317			(3,146	)		(1,171	)		—
Adjusted operating income (loss)	$	4,148		$	(2,213	)	$	4,052		$	5,987

¹ Includes restructuring charges of $0.1 million and $0.2 million in EMEA for the three and six months ended June 30, 2011, respectively.

² Includes restructuring charges totaling $0.2 million and $0.7 million in the Americas and EMEA, respectively.

³ Includes restructuring charges totaling $0.4 million and $2.3 million in the Americas and EMEA, respectively.

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

	June 30,		December 31,
	2011		2010
Americas	$	20,902	$	17,311
EMEA		12,199		12,092
Asia-Pacific		7,168		3,493
	$	40,269	$	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.

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• 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 June 30, 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 June 30, 2011, as the Company’s accounts receivable are generated from these business industries with customers located throughout the Americas, EMEA and Asia-Pacific.

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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 and six months ended June 30, 2011, consolidated revenues increased by $5.5 million and $12.1 million, respectively, compared to the three and six months ended June 30, 2010, primarily related to increases in leak sealing, line stopping and bolting services in the Americas. The Company’s net income for the three and six months ended June 30, 2011 increased by $1.6 million and $5.2 million, respectively, compared to the three and six months ended June 30, 2010. The increase in net income was a result of the increase in revenues for the current year three and six month periods, as well as lower restructuring costs and 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 under this initiative of approximately $3.4 million. The Company estimates the effects of this initiative have resulted in annual cost reductions at historical activity levels of approximately $11.0 million, primarily compensation expenses, which have favorably impacted 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 June 30, 2011, restructuring costs of $3.6 million have been incurred since the inception of this additional cost reduction initiative, with the remaining $0.4 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 by $0.2 million and $0.9 million and net income by $0.1 million and $0.8 million for the three months ended June 30, 2011 and 2010, respectively. Total restructuring costs negatively impacted operating income by $0.2 million and $2.7 million and net income by $0.2 million and $2.4 million for the six months ended June 30, 2011 and 2010, respectively.

The Company’s diluted earnings per share for the three and six months ended June 30, 2011 were $0.14 and $0.25, respectively, compared to $0.10 and $0.11, for the three and six months ended June 30, 2010, respectively.

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Results of Operations

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
	(in thousands, except per share data)
Revenues	$	83,009		$	77,513		$	156,063		$	143,948
Costs and expenses:
Operating costs (exclusive of depreciation and amortization)		56,425			51,922			106,868			97,584
Depreciation and amortization expense		2,198			1,572			4,073			3,121
Selling, general and administrative expense		17,779			18,493			34,690			37,256
Total costs and expenses		76,402			71,987			145,631			137,961
Operating income		6,607			5,526			10,432			5,987
Interest income and other income (expense), net		120			(246	)		242			96
Interest expense		(255	)		(241	)		(495	)		(482	)
Income before income taxes		6,472			5,039			10,179			5,601
Income tax expense		(1,326	)		(1,479	)		(1,007	)		(1,650	)
Net income	$	5,146		$	3,560		$	9,172		$	3,951
Earnings per share:
Basic	$	0.14		$	0.10		$	0.25		$	0.11
Diluted	$	0.14		$	0.10		$	0.25		$	0.11

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Geographical Information

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
	(in thousands)
Revenues:
Americas	$	40,943		$	37,550		$	81,170		$	69,117
EMEA		32,266			27,846			56,939			54,107
Asia-Pacific		9,800			12,117			17,954			20,724
Total revenues		83,009			77,513			156,063			143,948
Costs and expenses:
Operating costs (exclusive of depreciation and amortization)
Americas		27,522			25,260			54,626			46,024
EMEA		22,250			19,805			39,967			39,732
Asia-Pacific		6,653			6,857			12,275			11,828
Total operating costs (exclusive of depreciation and amortization)		56,425			51,922			106,868			97,584
Operating costs as a percentage of revenue		68.0	%		67.0	%		68.5	%		67.8	%
Depreciation and amortization expense
Americas, including corporate		1,159			846			2,188			1,658
EMEA		507			453			1,011			920
Asia-Pacific		532			273			874			543
Total depreciation and amortization expense		2,198			1,572			4,073			3,121
Depreciation and amortization expense as a percentage of revenue		2.6	%		2.0	%		2.6	%		2.2	%
Selling, general and administrative expense
Americas, including corporate		9,941			10,929			19,455			21,604
EMEA		6,210			6,019			11,900			12,522
Asia-Pacific		1,628			1,545			3,335			3,130
Total selling general and administrative expense		17,779			18,493			34,690			37,256
Selling, general and administrative expense as a percentage of revenue		21.4	%		23.9	%		22.2	%		25.9	%
Total costs and expenses	$	76,402		$	71,987		$	145,631		$	137,961

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 six months ended June 30, 2011, consolidated revenues increased by $12.1 million, or 8.4%, to $156.0 million, compared to $143.9 million for the six months ended June 30, 2010. Changes related to foreign currency exchange rates favorably impacted revenues by $7.0 million, of which $4.1 million, $2.6 million and $0.3 million were related to favorable impacts from EMEA, Asia-Pacific and Americas, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $5.1 million, or 3.5%, for the six months ended June 30, 2011 compared to the same period in the prior year. This $5.1 million increase in revenues consisted of $11.7 million increase in the Americas, partially offset by a $5.3 million decrease in Asia-Pacific and a $1.3 million decrease in EMEA. The increase in revenues in the Americas was primarily related to increases in on-line services, which included volume increases in leak sealing and line stopping services of approximately 31% when compared to revenues in the same period in the prior year. In addition, revenues increased within off-line services by approximately 15% related primarily to volume increases in bolting and valve repair services. The decrease in revenues in Asia-Pacific was attributable to decreases in both on-line and off-line services. The decreases within on-line services primarily included volume decreases in hot tapping services in Singapore as a large hot tapping project concluded in late 2010 and resulted in an approximate 33% decrease in hot tapping services when compared to revenue in the same period of the prior year. The decrease within Asia-Pacific’s off-line services primarily included

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volume decreases in bolting services in Australia of approximately 27% when compared to bolting revenues in the same period in the prior year, which was partially due to inclement weather conditions in the current year. The decrease in revenues in EMEA was primarily attributable to decreases in off-line services, which included volume decreases in heat exchanger repair services of approximately 5% when compared to revenues in the same period in the prior year.

For the three months ended June 30, 2011, consolidated revenues increased by $5.5 million, or 7.1%, to $83.0 million, compared to $77.5 million for the three months ended June 30, 2010. Changes related to foreign currency exchange rates favorably impacted revenues by $5.4 million, of which $3.5 million, $1.7 million and $0.2 million were related to favorable impacts in EMEA, Asia- Pacific and the Americas, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $0.1 million, or 0.1%, for the three months ended June 30, 2011 compared to the same period in the prior year. This $0.1 million increase in revenues consisted of increases of $3.2 million and $0.9 million in the Americas and EMEA, respectively, which were substantially offset by a decrease of $4.0 million in Asia-Pacific. The increase in revenues in the Americas was due to increases in on-line services, which included volume increases in leak sealing and line stopping services of approximately 28% when compared to revenues in the same period in the prior year. In addition, revenues increased within off-line services, which included volume increases in bolting and valve repair services of approximately 13% when compared to revenues in the prior years. These increases in the Americas were partially offset by decreases in other services as the three months ended June 30, 2010 included a $4.7 million hot tapping equipment package sale within manufacturing and product sales. The increase in revenues in EMEA was primarily attributable to increases in on-line services, which included volume increases in leak sealing services of approximately 16%, when compared to revenues in the same period in the prior year. The decrease in revenues in Asia-Pacific was related to decreases in both on-line and off-line services. The decreases in on-line services primarily related to volume decreases in hot tapping services within Singapore as a large hot tapping project concluded in late 2010 resulting in an approximate 28% decrease in hot tapping services when compared to revenues in the same period of the prior year. In addition, revenues decreased within off-line services primarily related to volume decreases in bolting and on-site machining services in Australia and resulted in an approximate 47% decrease in these services when compared to revenues in the same period of the prior year as the current year has been negatively impacted by inclement weather conditions.

Operating Costs (exclusive of depreciation and amortization)

For the six months ended June 30, 2011, operating costs, increased $9.3 million, or 9.5%, to $106.9 million, compared to $97.6 million for the six months ended June 30, 2010. Changes related to foreign currency exchange rates unfavorably impacted costs by $4.9 million, of which $3.0 million, $1.7 million and $0.2 million were related to unfavorable impacts from EMEA, Asia-Pacific and the Americas, respectively. Excluding the foreign currency exchange rate impact, operating costs increased $4.4 million, or 4.5%, for the six months ended June 30, 2011, compared to the same period in the prior year. This change consisted of an $8.4 million increase in the Americas, partially offset by decreases of $2.7 million and $1.3 million in EMEA and Asia-Pacific, respectively. The increase in operating costs in the Americas was primarily related to higher material, labor and equipment rental costs of approximately 16% when compared to the same period in the prior year, which were attributable to the increase in revenues. The decrease in EMEA was due to decreases in labor costs of 8% associated with the cost reduction initiatives and the decreases in revenues which was partially offset by increases in material costs of approximately 3%. In addition, severance related restructuring costs in EMEA decreased from $0.7 million for the six months ended June 30, 2010 to $0.1 million for the six months ended June 30, 2011. The decrease in operating costs in Asia-Pacific was primarily attributable to a decrease in labor and equipment rental costs of approximately 12% when compared to the same period in the prior year associated with the decreased revenues.

For the three months ended June 30, 2011, operating costs increased $4.5 million, or 8.7%, to $56.4 million, compared to $51.9 million for the three months ended June 30, 2010. Changes related to foreign currency exchange rates unfavorably impacted costs by $3.8 million, of which $2.5 million, $1.1 million and $0.2 million were related to unfavorable impacts in EMEA, Asia-Pacific and the Americas, respectively. Excluding the foreign currency exchange rate impact, operating costs increased by $0.7 million, or 1.3%, for the three months ended June 30, 2011, compared to the same period in the prior year. This change consisted of a $2.1 million increase in the Americas which was partially offset by a $1.3 million decrease in Asia-Pacific and a $0.1 million decrease in EMEA. The increase in operating costs in the Americas was primarily attributable to an increase in labor and equipment rental costs of approximately 8% and was associated with the increase in revenues when compared to the same period in the prior year. The decrease in Asia-Pacific was due to decreases in labor and equipment rental costs of 16% associated with decreases in revenues. The operating costs in EMEA remained relatively flat as increases in material costs were offset by decreases in labor costs.

Operating costs as a percentage of revenue were 68.0% and 67.0% for the three months ended June 30, 2011 and 2010, respectively, and 68.5% and 67.8% for the six months ended June 30, 2011 and 2010, respectively. The percentage of operating costs to revenues for the three and six months ended June 30, 2011 were slightly lower than the same periods in prior year due in part to certain higher margin large jobs in the prior year which did not recur in 2011.

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Depreciation and Amortization

For the three and six months ended June 30, 2011, depreciation and amortization expense increased $0.6 million, or 37.5%, and $1.0 million, or 32.3%, respectively, when compared to the same periods in the prior year. Changes related to foreign currency exchange rates unfavorably impacted depreciation and amortization expense by $0.1 million and $0.2 million for the three and six months ended June 30, 2011, respectively. Excluding the foreign currency exchange rate impact, depreciation and amortization expense for the three and six months ended June 30, 2011 was $0.5 million and $0.8 million higher compared to the same periods in the prior year, respectively. Depreciation and amortization expense increased as a result of the acquisition of Self Leveling Machines (the “SLM acquisition”) as well as the effects of capital expenditures of approximately $5.4 million placed in service over the twelve-month period ended June 30, 2011. Depreciation and amortization expense related to the SLM acquisition was $0.4 million and $0.5 million for the three and six months ended June 30, 2011, respectively.

Depreciation and amortization expense as a percentage of revenue were 2.6% and 2.0% for the three months ended June 30, 2011 and 2010, respectively, and 2.6% and 2.2% for the six months ended June 30, 2011 and 2010, respectively. When excluding depreciation and amortization expense related to the SLM acquisition, depreciation and amortization expense as a percentage of revenue was 2.2% and 2.3% for the three and six months ended June 30, 2011, respectively.

Selling, General and Administrative

For the six months ended June 30, 2011, selling, general and administrative expenses decreased $2.6 million, or 7.0%, to $34.7 million compared to $37.3 million for the six months ended June 30, 2010. Changes related to foreign currency exchange rates unfavorably impacted costs by $1.2 million, of which $0.8 million and $0.4 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate differences, selling, general and administrative expenses decreased $3.8 million, or 10.2%, for the six months ended June 30, 2011, compared to the same period in the prior year. This $3.8 million decrease in selling, general and administrative costs consisted of a $2.2 million, $1.4 million and a $0.2 million decrease in the Americas, EMEA and Asia-Pacific, respectively. Selling, general and administrative expense decreases in the Americas were related to reductions in salary and related costs of approximately 7% when compared to the same period in the prior year. In addition, the six months ended June 30, 2010 included approximately $0.5 million of costs incurred in connection with the retirement of the Company’s former Chairman and Chief Executive Officer and severance related restructuring charges of $0.4 million. There were no restructuring charges incurred for the six months ended June 30, 2011. In EMEA, decreases in selling, general and administrative costs were primarily a result of reductions in restructuring costs from $1.6 million for the six months ended June 30, 2010 to $0.1 million for the six months ended June 30, 2011. In Asia-Pacific, decreases in selling, general and administrative costs were primarily a result of reductions in salary and related costs of approximately 11% when compared to the same period in the prior year.

For the three months ended June 30, 2011, selling, general and administrative expenses decreased $0.7 million, or 3.8%, to $17.8 million compared to $18.5 million for the three months ended June 30, 2010. Changes related to foreign currency exchange rates unfavorably impacted costs by $1.0 million, of which $0.7 million and $0.3 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 $1.7 million, or 9.2%, for the three months ended June 30, 2011, compared to the same period in the prior year. This $1.7 million decrease in selling, general and administrative expenses consisted of $1.0 million, $0.5 million and $0.2 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 of approximately 10% 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 June 30, 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 $0.7 million for the three months ended June 30, 2010 to $0.1 million for the three months ended June 30, 2011. Decreases in selling, general and administrative expenses in Asia-Pacific were related to a 11% reduction in salary and related costs.

As a result of the above factors, selling, general and administrative costs as a percentage of revenues decreased to 21.4% and 22.2% for the three and six months ended June 30, 2011, respectively, compared to 23.9% and 25.9% for the three and six months ended June 30, 2010, respectively.

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Other Income

Interest Income and Other Income (Expense), Net

For the three and six months ended June 30, 2011, interest income and other income (expense) increased $0.4 million and $0.1 million, respectively, when compared to the same periods in the prior year. Interest income and other income (expense) primarily relates to exchange gains and losses on foreign currency denominated transactions.

Interest Expense

For both the three and six months ended June 30, 2011, consolidated interest expense was comparable to the three and six months ended June 30, 2010 as the increase in interest expense related to the SLM acquisition was partially offset by the impact of lower interest rates on outstanding borrowings under the Credit Agreement.

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 and six months ended June 30, 2011 and 2010 were fully reserved with changes offset by a corresponding change in valuation allowance. Income tax expense recorded for the three and six months ended June 30, 2011 consisted of income tax expenses in foreign and state jurisdictions in which the Company operates, with the six months ended June 30, 2011 partially offset by a valuation allowance change resulting in a deferred tax benefit of $1.2 million related to the SLM acquisition (see “Liquidity and Capital Resources” for additional information on the SLM acquisition). Income tax expense recorded for the three and six months ended June 30, 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.

Income tax expense as a percentage of income before income taxes was approximately 9.9% and 29.5% for the six months ended June 30, 2011 and 2010, respectively. For the three months ended June 30, 2011 and 2010 income tax expense as a percentage of income before income taxes was approximately 20.5% and 29.4%, respectively. Excluding the $1.2 million acquisition related deferred tax benefit noted above, the effective income tax rate for the six months ended June 30, 2011 was 21.9%. The remaining change in the income tax rates between periods is related to changes in the mix of income before income taxes between countries whose income taxes are offset by full valuation allowance and those that are not, and differing statutory tax rates in the countries in which the Company incurs tax liabilities.

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 $2.0 million for the six months ended June 30, 2011 compared to net cash provided by operating activities of $0.5 million for the six months ended June 30, 2010. The increase in net cash used in operating activities was primarily due to changes in working capital requirements, which decreased cash flows by $14.8 million for the six months ended June 30, 2011 compared to a decrease of approximately $7.7 million in the six months ended June 30, 2010. These decreases in cash flows were partially offset by a $5.2 million increase in net income for the six months ended June 30, 2011 due to higher revenues and lower restructuring costs as compared to the same period in prior year.

Net cash used in investing activities increased to $5.5 million for the six months ended June 30, 2011 from $3.6 million for the six months ended June 30, 2010 primarily due to $4.0 million of cash paid, net of cash acquired of $1.0 million, in connection with the SLM acquisition.

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The increase in cash used relating to the SLM acquisition is partially offset by a reduction in capital expenditures from $3.5 million for the six months ended June 30, 2010 to $1.6 million for the six months ended June 30, 2011. The decrease in capital expenditures compared to the prior year is due to the timing of capital projects placed in service in the current year as compared to the prior 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 provided by financing activities for the six months ended June 30, 2011 was $0.1 million compared to net cash used in financing activities of $0.1 million for the six months ended June 30, 2010. The increase is due to the issuance of $0.1 million in common stock related to stock option exercises. Financing activities related to principal payments on long-term capital leases during the current year period was consistent with the prior year period.

While the Company’s operating results for the six months ended June 30, 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 June 30, 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 2.2% at June 30, 2011 and 2.3% at 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 June 30, 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 $148.2 million of current assets and property and equipment as of June 30, 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 June 30, 2011, FWI was in compliance with all covenants under the Credit Agreement.

Considering the outstanding borrowings of $30.0 million, and $1.1 million related to outstanding letters of credit, the unused borrowing capacity under the Credit Agreement was $18.9 million at June 30, 2011, with a limit of $5.0 million of this capacity remaining for the designated borrowers.

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 $9.3 million, net of cash acquired of $1.0 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.

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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 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 June 30, 2011, $5.5 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 June 30, 2011, the costs incurred since the inception of these cost reduction initiatives totaled approximately $7.0 million. During the six months ended June 30, 2011, the Company incurred restructuring charges of $0.2 million related to the 2010 initiative and made cash payments of $1.1 million related to both the 2009 and 2010 initiatives. As of June 30, 2011, the remaining reserve associated with these initiatives totaled $0.8 million with estimated additional charges to be incurred of approximately $0.4 million, all of which are expected to require cash payments. Total workforce reductions in which severance costs were incurred related to the cost reduction initiatives 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 remaining 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 six months ended June 30, 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.

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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. 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).

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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.”

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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

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.

In June 2011, the FASB issued Accounting Standards Update 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs(“ASU 2011-04”). ASU 2011-04 clarifies the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 provides further clarification on the: (1) application of the highest and best use and valuation premise concepts, (2) fair value measurement of an instrument classified in a reporting entity’s shareholders’ equity, and (3) disclosure of unobservable inputs used in Level 3 fair value measurements. ASU 2011-04 also changes how fair value is measured for financial instruments that are managed within a portfolio and how premiums and discounts are applied in measuring fair value. In addition to the clarification of Level 3 disclosures, ASU 2011-04 requires additional disclosures for fair value measurements as it relates to the following: (1) the valuation process and sensitivity of changes in unobservable inputs, (2) a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and (3) the categorization by level of the fair value hierarchy for items that are not measured at fair value but for which the fair value is required to be disclosed. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011. The Company does not expect a material impact from the adoption of this guidance on the Company’s consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011-05,Presentation of Comprehensive Income(“ASU 2011-05”). ASU 2011-05 amends existing guidance by allowing only the following two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement or (2) in two separate but consecutive financial statements. In addition, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, the Company’s option to present components of other comprehensive income either net of related tax effects or before related tax effects, nor does it affect how earnings per share is calculated or presented. ASU 2011-05 requires retrospective application, and it is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The Company anticipates the adoption of this guidance will change the presentation and provide additional detail on certain consolidated financial statements, but will not have any other material impact.

Off-Balance Sheet Transactions

The Company was not a party to any off-balance sheet transactions at June 30, 2011 or December 31, 2010, or for the six months ended June 30, 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.

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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 June 30, 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 half of 2011 strengthened, 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 and six months ended June 30, 2011 when compared to the three and six months ended June 30, 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 six months ended June 30, 2011, foreign currency-based revenues and operating income of $80.0 million and $7.1 million, respectively, a ten percent decline in all applicable foreign currencies would result in a decrease in revenues and operating income of $7.3 million and $0.6 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 June 30, 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 June 30, 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.

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FURMANITE CORPORATION AND SUBSIDIARIES

PART II — Other Information

Item 1. Legal Proceedings

The operations of the Company are subject to federal, state and local laws and regulations in the United States and various foreign locations relating to protection of the environment. Although the Company believes its operations are in compliance with applicable environmental regulations, there can be no assurance that costs and liabilities will not be incurred by the Company. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from operations of the Company, could result in costs and liabilities to the Company. The Company has recorded, in other liabilities, an undiscounted reserve for environmental liabilities related to the remediation of site contamination for properties in the United States in the amount of $1.1 million and $1.2 million at June 30, 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 $1.5 million and $1.9 million were recorded in accrued expenses and other current liabilities as of June 30, 2011 and December 31, 2010, respectively.

Item 1A. Risk Factors

During the quarter ended June 30, 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.

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Item 6. Exhibits

3.1	Restated Certificate of Incorporation of the Registrant, dated September 26, 1979, incorporated by reference herein to Exhibit 3.1 to the 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).
10.1*	Furmanite Corporation 1994 Stock Incentive Plan as amended and restated June 14, 2011.
10.2*	Performance Based Long Term Executive Incentive Restricted Stock Grants.
31.1*	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2011.
31.2*	Certification of Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2011.
32.1*	Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2011.
32.2*	Certification of Principal Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2011.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.DEF**	XBRL Taxonomy Definition Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

*

Filed herewith.

**

These exhibits are furnished herewith. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

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Signature

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

FURMANITE CORPORATION
(Registrant)
 

/s/ ROBERT S. MUFF  

Robert S. Muff 

Chief Accounting Officer
(Principal Financial and Accounting Officer) 

Date: August 9, 2011

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