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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 September 30, 2006
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
XANSER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 74-1191271 | |
(State or other jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
2435 North Central Expressway, Richardson, Texas | 75080 | |
(Address of principal executive offices) | (Zip Code) |
(972) 699-4000
(Registrant’s telephone number, including area code)
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.þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer o Accelerated filer þ Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yes þ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class of Common Stock | Outstanding at October 31, 2006 | |
No Par Value | 34,900,662 shares |
Table of Contents
XANSER CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
QUARTER ENDED SEPTEMBER 30, 2006
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XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands – Except Per Share Amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues: | ||||||||||||||||
Services | $ | 60,211 | $ | 39,883 | $ | 179,085 | $ | 113,116 | ||||||||
Products | 49 | 518 | 513 | 5,925 | ||||||||||||
Total revenues | 60,260 | 40,401 | 179,598 | 119,041 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Operating costs | 60,440 | 36,705 | 172,154 | 108,721 | ||||||||||||
Cost of products sold | 12 | 526 | 276 | 6,369 | ||||||||||||
Depreciation and amortization | 808 | 900 | 2,661 | 2,729 | ||||||||||||
General and administrative | 944 | 891 | 3,085 | 2,327 | ||||||||||||
Total costs and expenses | 62,204 | 39,022 | 178,176 | 120,146 | ||||||||||||
Operating income (loss) | (1,944 | ) | 1,379 | 1,422 | (1,105 | ) | ||||||||||
Interest income | 243 | 213 | 655 | 487 | ||||||||||||
Interest expense | (955 | ) | (256 | ) | (1,981 | ) | (792 | ) | ||||||||
Income (loss) before income taxes | (2,656 | ) | 1,336 | 96 | (1,410 | ) | ||||||||||
Income tax (expense) | (652 | ) | (1,295 | ) | (2,684 | ) | (2,557 | ) | ||||||||
Net income (loss) | $ | (3,308 | ) | $ | 41 | $ | (2,588 | ) | $ | (3,967 | ) | |||||
Earnings (loss) per common share: | ||||||||||||||||
Basic | $ | (.10 | ) | $ | .00 | $ | (.08 | ) | $ | (.12 | ) | |||||
Diluted | $ | (.10 | ) | $ | .00 | $ | (.08 | ) | $ | (.12 | ) | |||||
See notes to condensed consolidated financial statements.
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XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 21,946 | $ | 21,526 | ||||
Accounts receivable, trade | 59,239 | 50,396 | ||||||
Receivable from businesses distributed to common stockholders | 1,882 | 6,484 | ||||||
Inventories | 20,463 | 17,290 | ||||||
Prepaid expenses and other | 5,582 | 5,513 | ||||||
Total current assets | 109,112 | 101,209 | ||||||
Property and equipment | 47,213 | 41,748 | ||||||
Less accumulated depreciation and amortization | 27,137 | 24,628 | ||||||
Net property and equipment | 20,076 | 17,120 | ||||||
Excess of cost over fair value of net assets of acquired businesses | 13,802 | 13,802 | ||||||
Deferred income taxes and other assets | 5,111 | 4,347 | ||||||
$ | 148,101 | $ | 136,478 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 755 | $ | 478 | ||||
Accounts payable | 14,343 | 14,672 | ||||||
Accrued expenses | 26,457 | 21,673 | ||||||
Accrued income taxes | 3,461 | 7,232 | ||||||
Total current liabilities | 45,016 | 44,055 | ||||||
Long-term debt, less current portion: | ||||||||
Technical services | 36,429 | 26,561 | ||||||
Information technology and government services | 133 | 178 | ||||||
Parent company | 5,000 | 5,000 | ||||||
Total long-term debt, less current portion | 41,562 | 31,739 | ||||||
Other liabilities | 11,026 | 9,380 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, without par value | 4,522 | 4,507 | ||||||
Additional paid-in capital | 124,025 | 124,481 | ||||||
Treasury stock, at cost | (18,452 | ) | (20,028 | ) | ||||
Retained earnings (accumulated deficit) | (53,153 | ) | (50,565 | ) | ||||
Accumulated other comprehensive income (loss) | (6,445 | ) | (7,091 | ) | ||||
Total stockholders’ equity | 50,497 | 51,304 | ||||||
$ | 148,101 | $ | 136,478 | |||||
See notes to condensed consolidated financial statements.
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XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2006 | 2005 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | (2,588 | ) | $ | (3,967 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,661 | 2,729 | ||||||
Provision for doubtful accounts | 1,895 | 800 | ||||||
Gain on sale of assets | — | (2,102 | ) | |||||
Non-recurring expenses | — | 1,333 | ||||||
Deferred income taxes | 79 | 385 | ||||||
Stock option expense | 132 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (10,738 | ) | (7,047 | ) | ||||
Inventories | (3,173 | ) | (1,494 | ) | ||||
Prepaid expenses and other | (69 | ) | 1,556 | |||||
Accounts payable and accrued expenses | 5,284 | 3,291 | ||||||
Net cash used in (provided by) operating activities | (6,517 | ) | (4,516 | ) | ||||
Investing activities: | ||||||||
Capital expenditures | (4,019 | ) | (3,210 | ) | ||||
Proceeds from sale of assets | — | 5,400 | ||||||
Other, net | (758 | ) | 777 | |||||
Net cash used in investing activities | (4,777 | ) | 2,967 | |||||
Financing activities: | ||||||||
Issuance of debt | 19,489 | 448 | ||||||
Payments on debt | (9,066 | ) | (1,739 | ) | ||||
Common stock issued and other | 1,003 | 2,313 | ||||||
Decrease in receivable from businesses distributed to common stockholders | 2 | 130 | ||||||
Net cash provided by financing activities | 11,428 | 1,152 | ||||||
Effect of exchange rate changes on cash | 286 | (305 | ) | |||||
Increase (decrease) in cash and cash equivalents | 420 | (702 | ) | |||||
Cash and cash equivalents at beginning of period | 21,526 | 21,598 | ||||||
Cash and cash equivalents at end of period | $ | 21,946 | $ | 20,896 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 1,757 | $ | 863 | ||||
Cash paid for income taxes | $ | 1,855 | $ | 1,476 | ||||
See notes to condensed consolidated financial statements.
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XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands)
(Unaudited)
Accumulated | |||||||||||||||||||||
Additional | Accumulated | Other | |||||||||||||||||||
Common | Paid-in | Treasury | Income | Comprehensive | |||||||||||||||||
Stock | Capital | Stock | (Deficit) | (Loss) | |||||||||||||||||
Balance at December 31, 2005 | $ | 4,507 | $ | 124,481 | $ | (20,028 | ) | $ | (50,565 | ) | $ | (7,091 | ) | ||||||||
Net (loss) for the period | — | — | — | (2,588 | ) | ||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 646 | ||||||||||||||||
Stock option expense | — | 132 | — | — | — | ||||||||||||||||
Stock options exercised | 15 | (588 | ) | 1,576 | — | ||||||||||||||||
Balance at September 30, 2006 | $ | 4,522 | $ | 124,025 | $ | (18,452 | ) | $ | (53,153 | ) | $ | (6,445 | ) | ||||||||
See notes to condensed consolidated financial statements.
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XANSER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
1. | GENERAL AND SIGNIFICANT ACCOUNTING POLICIES | |
The condensed consolidated financial statements include the accounts of Xanser Corporation (“Parent Company”) and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances are eliminated in consolidation. The unaudited condensed consolidated financial statements of the Company for the three and nine month periods ended September 30, 2006 and 2005 have been prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies followed by the Company are disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all of the adjustments, consisting of normal recurring accruals, necessary to present fairly the consolidated financial position of the Company at September 30, 2006, and the consolidated results of income and cash flows for the periods ended September 30, 2006 and 2005. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. | ||
Certain prior year condensed consolidated financial statement information in the condensed consolidated statements of cash flows have been reclassified to conform with the year 2005 and 2006 presentations. | ||
On November 27, 2000, the Board of Directors of the Company authorized the distribution of its pipeline, terminaling and product marketing businesses (the “Distribution”) to its stockholders in the form of a new limited liability company, Kaneb Services LLC (“KSL”). On June 29, 2001, the Distribution was completed, with each shareholder of the Company receiving one common share of KSL for each three shares of the Company’s common stock held on June 20, 2001, the record date for the Distribution, resulting in the distribution of 10.85 million KSL common shares. Pursuant to the Distribution, the Company entered into an agreement (the “Distribution Agreement”) with KSL, whereby, KSL is obligated to pay the Company amounts equal to certain expenses and tax liabilities incurred by the Company in connection with the Distribution. The Distribution Agreement also requires KSL to pay the Company an amount calculated based on any income tax liability of the Company that, in the sole judgment of the Company, (i) is attributable to increases in income tax from past years arising out of adjustments required by federal and state tax authorities, to the extent that such increases are properly allocable to the businesses that became part of KSL, or (ii) is attributable to the distribution of KSL’s common shares and the operations of KSL’s businesses prior to the Distribution date. In the event of an examination of the Company by federal or state tax authorities, the Company will have unfettered control over the examination, administrative appeal, settlement or litigation that may be involved, notwithstanding that KSL has agreed to pay any additional tax. In the quarter ended September 30, 2006, accrued income taxes and the receivable from businesses distributed to common stockholders were both reduced by $4.6 million related to the statutes for previously provided tax exposures. At September 30, 2006, $1.9 million was recorded as receivable from businesses distributed to common stockholders pursuant to the provisions of the Distribution Agreement. On July 1, 2005, KSL was purchased by Valero L.P., and Valero L.P. affirmatively assumed the obligations of KSL under the Distribution Agreement. | ||
2. | ACQUISITION | |
On December 31, 2005, Xanser Corporation’s (“Xanser”) wholly owned subsidiary, Furmanite Worldwide, Inc. (together with certain of its affiliates, “Furmanite”), entered into an Asset Purchase Agreement (“Acquisition Agreement”) with Flowserve US Inc. (together with its affiliates IPSCO |
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
(UK) Limited, Flowserve Repair & Services B.V., Flowserve Management Company and Flowserve Belgium N.V., “Flowserve”), pursuant to which Furmanite acquired substantially all of the material operating assets of Flowserve’s General Services Group (“GSG”), including certain working capital, and agreed to assume certain GSG liabilities, including certain environmental liabilities pertaining to GSG, for a total net consideration of approximately $17.4 million, subject to certain adjustments (which have not been finalized) based upon a post-closing determination of GSG’s working capital that was transferred to Furmanite (the “Acquisition”). GSG provided maintenance, repair and distribution services for a broad array of valves, piping systems and other process-system components with operating locations in North America and Europe, and Furmanite has integrated the purchased assets and related business activity with its existing technical services business. The transaction was consummated as of the close of business on December 31, 2005.As of the period ending September 30, 2006, post closing determination of the acquired working capital was still in process, and it is anticipated that additional procedures will be performed prior to the finalization of the process. | ||
3. | STOCK-BASED COMPENSATION | |
Prior to January 1, 2006, the Company accounted for stock-based employee compensation under the intrinsic value method as outlined in the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations while disclosing pro-forma net income and net income per share as if the fair value method had been applied in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Company’s employee stock options equaled or exceeded the market price of the underlying stock on the date of grant. Since the Company had issued all stock option grants with exercise prices equal to, or greater than, the market value of the common stock on the date of grant, through December 31, 2005, no compensation cost was recognized in the consolidated statements of income. | ||
Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No.25. SFAS 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such costs be measured at the fair value of the award. This statement was adopted by the Company using the modified prospective method, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based payment awards, expense is also recognized to reflect the remaining vesting period of awards that had been included in pro-forma disclosures in prior periods. Effective June 3, 2005, the Company vested all outstanding options to give the option holders the opportunity to become owners of the Company’s common stock sooner than they could have under their original grants. Shares issued upon exercise of the previously unvested portion of those options must be held and not sold until the date on which they would have otherwise vested under the terms of the original option grant and the plan. The impact of early vesting of the options on the net loss for 2005 was not significant. Compensation expense recognized in the consolidated statements of operations for the period ended September 30, 2006 includes options issued after June 3, 2005. The Company issued stock option grants that vest evenly over a five-year period for 105,000 shares for the nine months ended September 30, 2006. The Company issued stock option grants for 80,000 shares during the nine months ended September 30, 2005, at which time they were all vested. All options were granted at prices greater than or equal to the market price at the date of grant. The weighted average fair market value of options granted during the nine months ended September 30, 2006 and 2005 was $1.55 and $0.97 per share, respectively. The maximum contractual term of the stock options is 10 years. The Company uses authorized but unissued shares of common stock for stock option exercises |
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
pursuant to the Company’s stock option plans and treasury stock for issuances outside of the plan. The impact of the adoption of SFAS 123(R) on the unvested options outstanding at September 30, 2006 will result in approximately $441,000 in expense over the remaining vesting period of approximately five years.
The Company used the Black-Scholes option-pricing model (“Black-Scholes”) as its method of valuation under SFAS 123(R) in fiscal year 2006 and a single option award approach. This fair value computation is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Black-Scholes was also previously used for the Company’s pro forma information required under SFAS 123 for periods prior to fiscal year 2006. The fair value of share-based payment awards on the date of grant as determined by the Black-Scholes model is affected by the Company’s stock price as well as other assumptions. These assumptions include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.
The weighted-average estimated value of employee stock options granted after June 3, 2005 was estimated using the Black-Scholes model with the following weighted-average assumptions:
After June 3, 2005 | ||||
Expected volatility | 34.1% to 37.6 | % | ||
Risk-free interest rate | 4.1% to 5.1 | % | ||
Expected dividends | 0 | % | ||
Expected term in years | 3.5 |
The following table reflects net income and diluted earnings per share and pro forma information of the Company for the three months and nine months ended September 30, 2005 had compensation cost been determined in accordance with the fair value-based method prescribed by SFAS No. 123.
Three months ended | Nine months ended | |||||||
September 30, 2005 | September 30, 2005 | |||||||
Pro forma | Pro forma | |||||||
Net income (loss) | $ | 41 | $ | (3,967 | ) | |||
Stock-based employee compensation expense determined under the fair value based method(1) | (49 | ) | (509 | ) | ||||
Pro forma net income (loss) | $ | (8 | ) | $ | (4,476 | ) | ||
Earnings (loss) per share: | ||||||||
Basic and diluted, as reported(2) | $ | (.00 | ) | $ | (.12 | ) | ||
Basic and diluted, pro forma(2) | $ | (.00 | ) | $ | (.14 | ) | ||
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
(1) | Stock-based compensation expense for periods prior to year 2006 was calculated based on the pro forma application of SFAS 123. | |
(2) | Earnings per share for periods prior to year 2006 represent pro forma information based on SFAS 123. |
As a result of the adoption of Statement 123R, the Company’s net income was lower than under the previous accounting method for share-based compensation by $10,000 and $132,000 for the three and nine month periods ended September 30, 2006, respectively, with no effect on basic or diluted net earnings per common share for either period.
The following summarizes the shares of common stock under option for all plans at September 30, 2006 and the activity with respect to options for the nine months ended September 30, 2006:
Outstanding | Average Price | |||||||
Shares | Per Share | |||||||
Outstanding at December 31, 2005 | 1,611,694 | $ | 2.47 | |||||
Granted | 105,000 | $ | 4.73 | |||||
Exercised | (470,488 | ) | $ | 2.17 | ||||
Forfeited | (171,000 | ) | $ | 2.76 | ||||
Outstanding at September 30, 2006 | 1,075,206 | $ | 2.78 | |||||
Exercisable at September 30, 2006 | 610,206 | $ | 2.23 | |||||
Weighted | ||||||||
Average | ||||||||
Grant Date | ||||||||
Outstanding | Fair Value | |||||||
Shares | Per Share | |||||||
Nonvested at December 31, 2005 | 525,000 | $ | .96 | |||||
Granted | 105,000 | $ | 1.55 | |||||
Vested | (90,000 | ) | $ | 1.04 | ||||
Forfeited | (75,000 | ) | $ | 1.04 | ||||
Nonvested at September 30, 2006 | 465,000 | $ | 1.16 | |||||
The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2006 and 2005 was $452,000 and $1,884,000, respectively. The aggregate intrinsic value of the 1,075,206 stock options outstanding at September 30, 2006 was $1,231,000 with a weighted average remaining contractual life of 5.9 years. The aggregate intrinsic value of the 610,206 exercisable stock options at September 30, 2006 was $694,000 with a weighted-average remaining contractual life of 6.4 years. The total fair value of shares vested during the nine months ended September 30, 2005 was $627,000, primarily as a result of early vesting of 616,646 shares.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
At September 30, 2006, the range of option exercise prices, number of options granted, number of options exercisable and weighted average exercise price, are as follows:
Average | ||||||||||||||||||||
Average Price per | Remaining | |||||||||||||||||||
Range of Exercise | Options | Outstanding | Exercisable | Contractual | ||||||||||||||||
Price | Outstanding | Exercisable | Option | Option | Life (years) | |||||||||||||||
$0.82 - $1.23 | 20,000 | 20,000 | $ | 1.16 | $ | 1.16 | 0.4 | |||||||||||||
$1.24 - $1.86 | 158,928 | 158,928 | $ | 1.59 | $ | 1.59 | 2.7 | |||||||||||||
$1.87 - $2.81 | 373,778 | 373,778 | $ | 2.42 | $ | 2.42 | 6.9 | |||||||||||||
$2.82 - $5.34 | 522,500 | 57,500 | $ | 3.46 | $ | 3.14 | 5.2 | |||||||||||||
1,075,206 | 610,206 | $ | 2.78 | $ | 2.23 | 5.9 | ||||||||||||||
4. | COMPREHENSIVE INCOME (LOSS) | |
Comprehensive income (loss) for the three and nine months ended September 30, 2006 and 2005 is as follows: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income (loss) | $ | (3,308 | ) | $ | 41 | $ | (2,588 | ) | $ | (3,967 | ) | |||||
Foreign currency translation adjustment | (711 | ) | 134 | 646 | (2,015 | ) | ||||||||||
Comprehensive income (loss) | $ | (4,019 | ) | $ | 175 | $ | (1,942 | ) | $ | (5,982 | ) | |||||
At September 30, 2006 and December 31, 2005, accumulated other comprehensive income (loss) consisted of cumulative gains (losses) from foreign currency translation adjustments of $.1 million and $(.5) million, respectively, and cumulative losses from minimum pension liability adjustments for subsidiaries of $6.6 million and $6.6 million, respectively.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
5. | EARNINGS (LOSS) PER SHARE | |
The following is a reconciliation of basic and diluted earnings (loss) per share (in thousands, except for per share amounts): |
Weighted | ||||||||||||
Net | Average | Per | ||||||||||
Income | Common | Share | ||||||||||
(Loss) | Shares | Amount | ||||||||||
Three Months Ended September 30, 2006 | ||||||||||||
Basic earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | (3,308 | ) | 34,801 | $ | (.10 | ) | |||||
Effect of dilutive securities | — | — | ||||||||||
Diluted earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | (3,308 | ) | 34,801 | $ | (.10 | ) | |||||
Three Months Ended September 30, 2005 | ||||||||||||
Basic earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | 41 | 33,844 | $ | .00 | |||||||
Effect of dilutive securities | — | 351 | ||||||||||
Diluted earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | 41 | 34,195 | $ | .00 | |||||||
Nine Months Ended September 30, 2006 | ||||||||||||
Basic earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | (2,588 | ) | 34,666 | $ | (.08 | ) | |||||
Effect of dilutive securities | — | — | ||||||||||
Diluted earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | (2,588 | ) | 34,666 | $ | (.08 | ) | |||||
Nine Months Ended September 30, 2005 | ||||||||||||
Basic earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | (3,967 | ) | 32,420 | $ | (.12 | ) | |||||
Effect of dilutive securities | — | — | ||||||||||
Diluted earnings (loss) per share – | ||||||||||||
Net income (loss) | $ | (3,967 | ) | 32,420 | $ | (.12 | ) | |||||
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
As a result of the net loss for the three months and nine months ended September 30, 2006, 1,154,315 and 1,299,831 stock options at the weighted average exercise prices of $2.77 and $2.64, respectively, were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive. As a result of the net loss for the nine months ended September 30, 2005, 2,619,379 stock options at a weighted net average price of $1.92 were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive. Options to purchase 133,500 and 30,432 shares of common stock at a weighted average price of $2.79 and $3.07, respectively, were outstanding for the three and nine month periods ended September 30, 2005, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market prices of the common stock. The Company’s 8.75% convertible subordinated debentures were excluded from the computation of diluted earnings per share for the three and nine month periods ended September 30, 2006 and 2005, because the effect of assumed conversion would be anti-dilutive. | ||
6. | INCOME TAXES | |
Income (loss) before income taxes is comprised of the following components: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Domestic operations | $ | (6,671 | ) | $ | (1,838 | ) | $ | (9,724 | ) | $ | (8,597 | ) | ||||
Foreign operations | 4,015 | 3,174 | 9,820 | 7,187 | ||||||||||||
Income (loss) before income taxes | $ | (2,656 | ) | $ | 1,336 | $ | 96 | $ | (1,410 | ) | ||||||
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
The reasons for the differences between the amount of tax expense (benefit) provided and the amount of tax expense (benefit) computed by applying the statutory federal income tax rate to income (loss) before income taxes are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Expected tax expense (benefit) at statutory rates | $ | (903 | ) | $ | 454 | $ | 33 | $ | (479 | ) | ||||||
Increase (decrease) in taxes resulting from: | ||||||||||||||||
Change in valuation allowance | 2,390 | 735 | 3,441 | 3,182 | ||||||||||||
State income taxes, net | (211 | ) | (65 | ) | (305 | ) | (282 | ) | ||||||||
Foreign tax rate differences | (556 | ) | 131 | (655 | ) | 126 | ||||||||||
Permanent differences | 90 | (46 | ) | 170 | 21 | |||||||||||
Resolution of state and foreign tax issues | (157 | ) | 85 | — | (13 | ) | ||||||||||
Other | (1 | ) | 1 | — | 2 | |||||||||||
Income tax expense | $ | 652 | $ | 1,295 | $ | 2,684 | $ | 2,557 | ||||||||
7. | RETIREMENT PLAN | |
One of the Company’s foreign subsidiaries has a defined benefit pension plan covering substantially all of its United Kingdom employees (the “U.K. Plan”). Net pension cost for the U.K. Plan included the following components: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Net periodic pension cost: | ||||||||||||||||
Service cost | $ | 128 | $ | 119 | $ | 384 | $ | 367 | ||||||||
Interest cost | 888 | 890 | 2,664 | 2,740 | ||||||||||||
Expected return on plan assets | (960 | ) | (963 | ) | (2,880 | ) | (2,966 | ) | ||||||||
Amortization of prior service cost | (27 | ) | (27 | ) | (81 | ) | (84 | ) | ||||||||
Recognized net gain | 175 | 132 | 525 | 406 | ||||||||||||
Net periodic pension cost | $ | 204 | $ | 151 | $ | 612 | $ | 463 | ||||||||
In September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158 which requires recognition of the over or underfunded status of defined benefit postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. For pension plans, the benefit obligation is the projected benefit obligation, for other postretirement plans, the benefit obligation is the accumulated postretirement obligation. Upon adoption, SFAS 158 will require the recognition of previously unrecognized actuarial gains and losses and prior service costs within accumulated other comprehensive income, net of tax. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006. SFAS 158 will require the
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
Company to bring the unfunded position of the U.K. Plan to the Company’s balance sheet. As of December 31, 2005, the U.K. Plan reported a Net Pension Liability of $8,149,000. | ||
8. | CONTINGENCIES | |
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 materially adverse effect on the financial position or results of operations or liquidity of the Company. | ||
9. | BUSINESS SEGMENT DATA | |
The Company provides technical services to an international client base that includes refineries, chemical plants, pipelines, offshore drilling and production platforms, steel mills, food and drink processing facilities, power generation, and other process industries. Additionally, the Company’s information technology and government services segment has provided consulting services, hardware sales and other related information management and processing services to healthcare customers and governmental agencies. After the end of the quarter ended June 30, 2006, management determined that it would complete the existing contracts with current healthcare customers but would not pursue new healthcare business and that it would build its information technology business in the government sector. | ||
The Company measures segment profit as operating income. Segment operating results are reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. General corporate includes compensation and benefits paid to corporate officers and employees, certain insurance, legal, tax, financial reporting and other administrative costs, including costs of maintaining a public company, which are not related to specific business segments. | ||
Segment assets are those assets, including excess of cost over fair value of net assets of acquired businesses, controlled by each reportable segment. General corporate assets include corporate cash balances, deferred taxes and other assets not related to specific segments. Business segment data is as follows: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Business segment revenues: | ||||||||||||||||
Technical services | $ | 57,588 | $ | 35,403 | $ | 170,764 | $ | 100,911 | ||||||||
Information technology and government services | 2,672 | 4,998 | 8,834 | 18,130 | ||||||||||||
$ | 60,260 | $ | 40,401 | $ | 179,598 | $ | 119,041 | |||||||||
Technical services segment revenues: | ||||||||||||||||
Underpressure services | $ | 19,950 | $ | 12,774 | $ | 57,853 | $ | 38,049 | ||||||||
Turnaround and valve repair services | 25,322 | 16,307 | 78,681 | 45,605 | ||||||||||||
Other services | 12,316 | 6,322 | 34,230 | 17,257 | ||||||||||||
$ | 57,588 | $ | 35,403 | $ | 170,764 | $ | 100,911 | |||||||||
Business segment profit (loss): | ||||||||||||||||
Technical services | $ | 1,677 | $ | 3,542 | $ | 9,589 | $ | 7,986 | ||||||||
Information technology and government services | (2,677 | ) | (1,272 | ) | (5,082 | ) | (6,764 | ) | ||||||||
General corporate | (944 | ) | (891 | ) | (3,085 | ) | (2,327 | ) | ||||||||
Operating income (loss) | (1,944 | ) | 1,379 | 1,422 | (1,105 | ) | ||||||||||
Interest income | 243 | 213 | 655 | 487 | ||||||||||||
Interest expense | (955 | ) | (256 | ) | (1,981 | ) | (792 | ) | ||||||||
Income (loss) before income taxes | $ | (2,656 | ) | $ | 1,336 | $ | 96 | $ | (1,410 | ) | ||||||
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
Total assets: | ||||||||
Technical services(a) | $ | 120,610 | $ | 100,299 | ||||
Information technology and government services | 9,197 | 16,506 | ||||||
General corporate | 18,294 | 19,673 | ||||||
$ | 148,101 | $ | 136,478 | |||||
(a) | Technical services assets increased mainly due to additional working capital required as a result of the acquisition of the operating assets of GSG. |
10. | NEW ACCOUNTING STANDARDS | |
In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, or FIN 48, an interpretation of FASB No. 109,Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of determining the impact of the adoption of this Interpretation on its consolidated financial statements. |
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, (SAB) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements. Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements, the “roll-over” method and the “iron curtain” method. While the roll-over method primarily quantifies the amount by which the current year income statement is misstated, the iron curtain method primarily quantifies the error as the cumulative amount by which the current year balance sheet is misstated.
SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. The Company is in the process of determining the impact of the adoption of SAB 108 on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which establishes a framework for measuring fair value under other accounting pronouncements that require fair value measurements and expands disclosures about such measurements. SFAS No. 157 does not require any new fair value measurements, but rather it creates a consistent method for calculating fair value measurements to address non-comparability of financial statements containing fair value measurements utilizing different definitions of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not anticipate that the adoption of SFAS No. 157 will have a significant impact on its consolidated financial position, results of operations or cash flows.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Unaudited)
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion should be read in conjunction with the condensed consolidated financial statements of Xanser Corporation (the “Parent”) and its subsidiaries (collectively the “Company”) and notes thereto included elsewhere in this report.
Overview
The Company conducts its principal businesses through subsidiaries in two industry segments, technical services and information technology and government services. The technical services segment operates through Furmanite Worldwide, Inc., and its domestic and international subsidiaries and affiliates (collectively, “Furmanite”), and provides specialized technical services including leak sealing under pressure, on-site machining, valve testing and repair and other engineering products and services, primarily to electric power generating plants, petroleum refineries and other process industries in the United Kingdom, Continental Europe, North America, Latin America and Asia-Pacific. For additional information see “Technical Services”. Xtria LLC (“Xtria”) provides services to the information technology industry and government agencies. Xtria offers products and services that include workflow analysis, data storage solutions, hardware design and implementation, web hosted data processing, network analysis, consulting, research, program and policy analysis, program implementation and program evaluation and other support services to the healthcare industry and agencies of the state and federal government. After the end of the quarter ended June 30, 2006, management determined that it would complete the existing contracts with current healthcare customers but would not pursue new healthcare business and that it would build its business in the government sector.
Consolidated Results of Operations
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands – except per share amounts) | ||||||||||||||||
Revenues | $ | 60,260 | $ | 40,401 | $ | 179,598 | $ | 119,041 | ||||||||
Operating income (loss) | $ | (1,944 | ) | $ | 1,379 | $ | 1,422 | $ | (1,105 | ) | ||||||
Net income (loss) | $ | (3,308 | ) | $ | 41 | $ | (2,588 | ) | $ | (3,967 | ) | |||||
Earnings (loss) per common share – basic and diluted | $ | (.10 | ) | $ | — | $ | (.08 | ) | $ | (.12 | ) | |||||
Capital expenditures | $ | 1,167 | $ | 532 | $ | 4,019 | $ | 3,210 | ||||||||
For the three months ended September 30, 2006, consolidated revenues increased by $19.9 million, or 49%, when compared to the same 2005 period, due to a $22.2 million increase in revenues from the technical services business (see “Technical Services” below), partially offset by a $2.3 million decrease in revenues from the information technology and government services business (see “Information Technology and Government Services” below). Consolidated operating income for the three months ended September 30, 2006 decreased by $3.3 million, when compared to the third quarter of 2005, due primarily to a $1.9 million decrease in operating income from the technical services business, and a $1.4 million increase in operating loss from the information technology and government services business, and a $(0.1) million increase in operating loss from general corporate.
For the nine months ended September 30, 2006, consolidated revenues increased by $60.6 million, or 51%, when compared to the same 2005 period, due to a $69.9 million increase in revenues from the technical services business (see “Technical Services” below) offset by a $9.3 million decrease in
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
revenues from the information technology and government services business (see “Information Technology and Government Services” below). Consolidated operating income for the nine months ended September 30, 2006 increased by $2.5 million when compared to the same period in 2005, due to a $1.6 million increase in technical services operating income and a $1.7 million decrease in operating loss from the information technology and government services business, offset by $(0.8) million increase from General Corporate. Net loss for the nine months ended September 30, 2006 decreased by $1.4 million when compared to the same period in 2005.
Technical Services
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
United States | $ | 22,106 | $ | 7,176 | $ | 70,568 | $ | 21,499 | ||||||||
Europe | 29,644 | 21,836 | 83,718 | 61,741 | ||||||||||||
Asia-Pacific | 5,838 | 6,391 | 16,478 | 17,671 | ||||||||||||
Total revenues | $ | 57,588 | $ | 35,403 | $ | 170,764 | $ | 100,911 | ||||||||
Operating income: | ||||||||||||||||
United States | $ | (2,873 | ) | $ | (23 | ) | $ | (1,474 | ) | $ | (31 | ) | ||||
Europe | 4,458 | 3,493 | 11,255 | 7,878 | ||||||||||||
Asia-Pacific | 997 | 1,032 | 2,931 | 2,852 | ||||||||||||
Headquarters | (905 | ) | (960 | ) | (3,123 | ) | (2,713 | ) | ||||||||
Total operating income | $ | 1,677 | $ | 3,542 | $ | 9,589 | $ | 7,986 | ||||||||
Capital expenditures | $ | 797 | $ | 352 | $ | 3,619 | $ | 1,863 | ||||||||
For the three months ended September 30, 2006, revenues for the technical services business increased by $22.2 million, or 63%, when compared to the same period in 2005, primarily as a result of the acquisition of Flowserve’s General Services Group (“GSG”). In the United States, revenues increased by $14.9 million, or 208%, when compared to the third quarter of 2005 primarily as a result of the acquisition of GSG. In Europe, revenues increased by $7.8 million, or 36%, when compared to the third quarter of 2005, primarily as a result of the acquisition of Flowserve’s General Services Group (“GSG”) and increases in turnaround and valve repair services and other process plant services. In Asia-Pacific, revenues decreased by $0.5 million, or 9%, when compared to the third quarter of 2005 as a result of anticipated delays in the replacement of expiring service contracts. The foreign currency exchange rate had a positive effect of $1.3 million in Europe and an insignificant effect in Asia-Pacific when compared to the effect of foreign currency exchange rates in 2005.
For the three months ended September 30, 2006, technical services operating income decreased by $1.9 million, or 53%, when compared to the same 2005 period. In the United States, operating loss increased by $2.8 million, when compared to the same period in 2005, due primarily to integration costs as a result of the acquisition of Flowserve’s General Services Group (“GSG”) and unusually high legal expenses relating to the acquisition of GSG and the expansion of the business. In Europe, operating income increased by $1.0 million, or 28%, when compared to the same 2005 period, due to overall higher revenues and higher operating margins and the acquisition. In Asia-Pacific, operating income was about the same when compared to the same period
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
2005. The effect of foreign currency exchange rates on third quarter 2006 operating income was not significant.
For the nine months ended September 30, 2006, revenues for the technical services business increased by $69.9 million, or 69%, when compared to the same 2005 period. In the United States, revenues increased by $49.1 million, when compared to the first nine months of 2005, primarily as a result of the acquisition of Flowserve’s General Services Group (“GSG”). In Europe, revenues increased by $22.0 million, or 36%, when compared to the first nine months of 2005, primarily as a result of the acquisition of GSG and increases in turnaround and valve repair and other process plant services. In Asia-Pacific, revenues decreased by $1.2 million, or 7%, when compared to the first nine months of 2005 primarily due to anticipated delays in the replacement of expiring service contracts. The effect of foreign currency exchange rate was $(0.3) million in Europe and $(0.3) million in Asia-Pacific when compared to the effect of foreign currency exchange rates in 2005.
For the nine months ended September 30, 2006, technical services operating income increased by $1.6 million, or 20%, when compared to the same period in 2005. In the United States, operating loss increased by $1.4 million, when compared to the same period in 2005 primarily due to integration costs as a result of the acquisition of GSG and unusually high legal expenses relating to the acquisition of GSG and the expansion of the business. In Europe, operating income increased by $3.4 million, or 43%, when compared to the same period in 2005, due to overall higher revenues resulting from the acquisition of GSG and higher operating margins. In Asia-Pacific, operating income increased by $0.1 million, or 3% when compared to the same 2005 period. The technical services headquarters costs increased by $0.4 million when compared to the same 2005 period. The effect of foreign currency exchange rates on operating income was not significant.
Information Technology and Government Services
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenues | $ | 2,672 | $ | 4,998 | $ | 8,834 | $ | 18,130 | ||||||||
Operating income (loss) | $ | (2,677 | ) | $ | (1,272 | ) | $ | (5,082 | ) | $ | (6,764 | ) | ||||
Capital expenditures | $ | 12 | $ | 180 | $ | 42 | $ | 1,347 | ||||||||
For the three month period ended September 30, 2006, information technology and government services revenues decreased by $2.3 million, or 47%, when compared to the three months ended September 30, 2005, due to anticipated decreases in healthcare and financial and insurance services revenues. As the Company refocused its efforts on higher margin service offerings, software, technology and other assets related to a product line not consistent with future service offerings were sold or written off in the second half of 2005.
For the three month period ended September 30, 2006, information technology and government services operating loss increased by $1.4 million, when compared to the three months ended September 30, 2005, primarily due to unusually high legal expenses and termination and other costs related to old business.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
For the nine month period ended September 30, 2006, information technology and government services revenues decreased by $9.3 million or 51% when compared to the nine months ended September 30, 2005, primarily due to a $6.4 million decrease in healthcare revenues.
For the nine month period ended September 30, 2006, information technology and government services operating loss decreased by $1.7 million, or 25% when compared to the nine months ended September 30, 2005, due primarily to a $2.4 million decrease in healthcare losses.
During the first half of 2006, management reviewed the performance of the information technology and government services business with a view towards effecting operational changes to eliminate losses from these operations. After the end of the quarter ended June 30, 2006, management determined that it would complete the existing contracts with current healthcare customers but would not pursue new healthcare business and that it would build its business in the government sector.
Income Taxes
The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. Based on the Company’s uncertainty regarding the generation of future taxable income, all domestic federal tax benefits recorded for the three and nine month periods ended September 30, 2006 and 2005 are fully offset by a corresponding change in valuation allowance.
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.
Liquidity and Capital Resources
Cash used in operating activities was $11.1 million and $4.5 million for the nine months ended September 30, 2006 and 2005, respectively. During the nine months ended September 30, 2006, the Company’s working capital requirements for operations and capital expenditures were funded through the use of internally generated funds. However, a net total of $9.5 million was drawn from the $50 million facility and the $15 million facility to fund increased working capital requirements resulting from the acquisition of GSG.
Capital expenditures were $4.0 million and $3.2 million for the nine month periods ended September 30, 2006 and 2005, respectively. Consolidated capital expenditures for the year 2006 have been budgeted at $3.0 million to $5.0 million, depending on the economic environment and the needs of the business. Such expenditures, however, will depend on many factors beyond the Company’s control, including demand for services in the technical services and information technology and government services businesses, and local, state and federal government regulations. No assurance can be given that required capital expenditures will not exceed anticipated amounts during 2006 or thereafter. Capital expenditures (excluding acquisitions) during the year are expected to be funded from existing cash and anticipated cash flows from operations.
At September 30, 2006, $21.6 million was outstanding under a $50 million amended and restated bank loan agreement (the “$50 million facility”) that provides working capital for the technical services segment and is without recourse to the Company. Borrowings under the $50 million facility bear interest at
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
the option of the borrower at variable rates (5.89% at September 30, 2006), based on either the LIBOR rate or prime rate, have a commitment fee on the unused portion of the facility and contain certain financial and operational covenants with respect to the technical services group, including percentage of tangible assets and revenues related to certain geographical areas, ratios of debt to cash flow, as defined in the $50 million facility, and cash flow to fixed charges and capital expenditures. At September 30, 2006, the borrower was in compliance with all covenants under this facility. The $50 million facility matures in January 2010 and is secured by substantially all of the tangible assets of the technical services group.
On March 31, 2006, a subsidiary in the technical services segment borrowed $8.5 million under a $15 million revolving bank loan agreement that provides working capital for the technical services segment (the “$15 million facility”) and used the proceeds to repay amounts outstanding under the $50 million facility. During the three months ended June 30, 2006, an additional $4.5 million was drawn under the $15 million facility for working capital purposes. During the three months ended September 30, 2006 an additional $1.0 million was drawn under the $15 million facility. Borrowings under the $15 million facility ($14.0 million at September 30, 2006) bear interest at the option of the borrower at variable rates (5.89% at September 30, 2006), based on either the LIBOR rate or prime rate and are secured by a letter of credit under the $50 million facility. The $15 million facility has the same financial and operational covenants with respect to the technical services group and is without recourse to the Parent Company. At September 30, 2006, the borrower was in compliance with all covenants under this facility.
The Parent Company’s 8.75% subordinated debentures ($5.0 million outstanding at September 30, 2006) are convertible into shares of the Company’s common stock at the conversion price of $5.26 per share.
Off-Balance Sheet Transactions
The Company was not a party to any off-balance sheet transactions at September 30, 2006, or for the three and nine month periods ended September 30, 2006 and 2005.
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 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.
Critical accounting policies are those that are most important to the portrayal of our 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. Our most critical accounting policies pertain to revenue recognition, allowance for doubtful accounts, the impairment of excess of cost over fair value of net assets of acquired businesses and income taxes. Critical accounting policies are discussed regularly (at least quarterly) with the Company’s Audit Committee.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Revenues are recorded in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition in Financial Statements”, as amended by SAB No. 104.
The technical services segment’s revenues are based primarily on time and materials and are generally short term in nature. Revenues are recognized when services to customers have been rendered or when products are shipped and risk of ownership is passed to the customer. The technical services business provides limited warranties to customers, depending upon the service performed. Warranty claim costs were not material during the year ended December 31, 2005 and the nine months ended September 30, 2006.
The information technology and government services segment’s revenues under long-term service contracts are accounted for using a proportional performance method or on a straight-line basis. The accounting policies for revenue recognition in the information technology and government services segment comply with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. ETIF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Under cost-plus, fixed or award-fee cost contracts, revenues are recognized as costs are incurred and include an estimate of applicable fees earned.
The Company’s technical services and information technology and government services businesses evaluate and adjust allowances for doubtful accounts receivable through a continuous process of assessing accounts receivable balances on individual customers and on an overall basis. This process consists of, among other tasks, a review of historical collection experience, current aging status and financial condition of customers. As this process involves a significant amount of judgment and estimation, and sometimes involves significant dollar amounts, actual write-offs could differ from estimated amounts, which could have a material effect on the results of operations of the Company.
The Company follows SFAS No. 142, which eliminates the amortization for goodwill (excess of cost over fair value of net assets of acquired businesses) and other intangible assets with indefinite lives. Under SFAS No. 142, intangible assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives. As of December 31, 2005, the Company had no intangible assets subject to amortization under SFAS No. 142. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Based on valuations and analysis performed by the Company at September 30, 2006 and December 31, 2005, 2004 and 2003, no additional impairment charge was required.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Future evaluations of the fair value of goodwill and other intangible assets are dependent on many factors, several of which are out of the Company’s control, including the demand for services provided. To the extent that such factors or conditions change, it is possible that future impairments could occur (up to the current goodwill carrying value of $13.8 million), which could have a material effect on the results of operations of the Company.
At September 30, 2006, the Company had a significant amount of net deferred tax assets, which consisted principally of net operating loss carryforwards, alternative minimum tax credit carryforwards and temporary differences resulting from differences in the tax and book basis of certain assets and liabilities. The alternative minimum tax credit carryforwards have no expiration date. The net operating loss carryforwards available as of December 31, 2005 expire, if unused, as follows: $1.2 million in 2006; $3.0 million in 2007; $13.4 million in 2022; $10.9 million in 2023; $1.2 million in 2024; and $12.3 million in 2025. The utilization of net operating loss carryforwards and alternative minimum tax credit carryforwards could be subject to limitation in the event of a change in ownership, as defined in the tax laws, which might be caused by purchases or sales of the Company’s securities by persons or groups now or in the future having 5% or greater ownership of the Company’s common stock. The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in accordance with SFAS No. 109 “Accounting for Income Taxes”. Based on evaluations performed by the Company pursuant to SFAS No. 109 in the fourth quarter of 2003, a non-cash valuation allowance of $12.1 million was provided with respect to the Company’s federal and state net deferred tax assets. The net deferred tax assets in 2006 and 2005 relate to foreign tax matters. To the extent that factors or conditions change, it is possible that reductions in the non-cash valuation allowance could occur, which could have a material effect on the results of operations of the Company.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, or FIN 48, an interpretation of FASB No. 109,Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of determining the impact of the adoption of this Interpretation on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, (SAB) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements. Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements, the “roll-over” method and the “iron curtain” method. While the roll-over method primarily quantifies the amount by which the current year income statement is misstated, the iron curtain method primarily quantifies the error as the cumulative amount by which the current year balance sheet is misstated.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. The Company is in the process of determining the impact of the adoption of SAB 108 on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which establishes a framework for measuring fair value under other accounting pronouncements that require fair value measurements and expands disclosures about such measurements. SFAS No. 157 does not require any new fair value measurements, but rather it creates a consistent method for calculating fair value measurements to address non-comparability of financial statements containing fair value measurements utilizing different definitions of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not anticipate that the adoption of SFAS No. 157 will have a significant impact on its consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158 which requires recognition of the over or underfunded status of defined benefit postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. For pension plans, the benefit obligation is the projected benefit obligation, for other postretirement plans, the benefit obligation is the accumulated postretirement obligation. Upon adoption, SFAS 158 will require the recognition of previously unrecognized actuarial gains and losses and prior service costs within accumulated other comprehensive income, net of tax. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006. The Company is in the process of determining the impact of the adoption of SFAS 158 on its consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks pursuant to this Item (i.e.,the risk of loss arising from the adverse changes in market rates and prices) to which the Company is exposed are 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 amounts of variable rate debt of $35.6 million at September 30, 2006, a one percent increase in interest rates would increase annual interest expense by approximately $0.4 million.
A significant portion of the technical services business is exposed to fluctuations in foreign currency exchange rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Technical Services”. Based on annual 2005 foreign currency-based revenues and operating income of $102.4 million and $12.9 million, respectively, a one percent fluctuation of all applicable foreign currencies would result in an annual change in revenues and operating income of $1.0 million and $0.13 million, respectively.
Item 4. Controls and Procedures
The Company’s principal executive officer and principal financial officer, after evaluating, as of September 30, 2006, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), have concluded that, as of such date, the Company’s disclosure controls and procedures are adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. Disclosure controls and procedures include those designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management to allow for timely decisions regarding disclosure.
During the quarter ended September 30, 2006, there have not been any changes in the Company’s internal controls over financial reporting that have affected, or are reasonably likely to affect, those internal controls subsequent to the date of the evaluation. As a result, no corrective actions were required or undertaken.
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Part II — Other Information
Item 1 A. Risk Factors
There have been no material changes to the risk factors presented in our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits
(a) | Exhibits. | ||
2.1 | Asset Purchase Agreement, dated December 31, 2005, among Flowserve US Inc., IPSCO (UK) Limited, Flowserve Repair & Services B.V., Flowserve Management Company, Flowserve Belgium N.V., Furmanite US GSG LLC, Furmanite GSG Limited, Furmanite GSG BVBA, Furmanite Worldwide, Inc. and Furmanite GSG B.V., filed as Exhibit 2.1 of the exhibits to the Registrant’s Current Report on Form 8-K filed on January 6, 2006, which exhibit is hereby incorporated by reference. | ||
3.1 | Amended and Restated Xanser Corporation Bylaws as of September 14, 2006 filed herewith as exhibit 3.1. | ||
3.2 | Restated Certificate of Incorporation of the Registrant, dated September 26, 1979, filed as Exhibit 3.1 of the exhibits to the Registrant’s Registration Statement on Form S-16, which exhibit is hereby incorporated by reference. | ||
3.3 | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated April 30, 1981, filed as Exhibit 3.2 of the exhibits to the Registrant’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 1981, which exhibit is hereby incorporated by reference. | ||
3.4 | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated May 28, 1985, filed as Exhibit 4.1 of the exhibits to the Registrant’s Quarterly Report on Form 10-Q (“Form 10-Q”) for the quarter ended June 30, 1985, which exhibit is hereby incorporated by reference. | ||
3.5 | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated September 17, 1985, filed as Exhibit 4.1 of the exhibits to the Registrant’s Form 10-Q for the quarter ended September 30, 1985, which exhibit is hereby incorporated by reference. | ||
3.6 | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated July 10, 1990, filed as Exhibit 3.5 of the exhibits to the Registrant’s Form 10-K for the year ended December 31, 1990, which exhibit is hereby incorporated by reference. |
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3.7 | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated September 21, 1990, filed as Exhibit 3.5 of the exhibits to the Registrant’s Form 10-Q for the quarter ended September 30, 1990, which exhibit is hereby incorporated by reference. | ||
3.8 | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated August 8, 2001, filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 22, 2001, which exhibit is hereby incorporated by reference. | ||
3.9 | By-laws of the Registrant, as amended and restated March 10, 2005, filed as exhibit 3.8 to Registrant’s Form 10-K for the year ended December 31, 2004, which exhibit is hereby incorporated by reference. | ||
4.1 | Certificate of Designation related to the Registrant’s Adjustable Rate Cumulative Class A Preferred Stock, filed as Exhibit 4 of the exhibits to the Registrant’s Form 10-Q for the quarter ended September 30, 1983, which exhibit is hereby incorporated by reference. | ||
4.2 | 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, 1998, which exhibit is incorporated herein by reference. | ||
4.3 | Certificate of Designation related to the Registrant’s Adjustable Rate Cumulative Class A Preferred Stock, Series C, dated April 23, 1991, filed as Exhibit 4.4 of the exhibits to Registrant’s Form 10-K for the year ended December 31, 1991, which exhibit is hereby incorporated by reference. | ||
10.1 | Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith. | ||
10.2 | Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith. | ||
10.3 | Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith. | ||
10.4 | Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith. | ||
10.5 | Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith. | ||
31.1 | Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 14, 2006. | ||
31.2 | Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 14, 2006. | ||
32.1 | Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated August 14, 2006. | ||
32.2 | Certification of Chief Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated August 14, 2006. |
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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.
XANSER CORPORATION (Registrant) | ||||
Date: November 14, 2006 | /s/ HOWARD C. WADSWORTH | |||
Howard C. Wadsworth | ||||
Chief Accounting Officer (Duly Authorized Officer) | ||||
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