Furmanite 10-Q 2007 Q3 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 September 30, 2007

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 (State or other jurisdiction of Incorporation or organization)	74-1191271 (I.R.S. Employer Identification No.)
2435 North Central Expressway Suite 700 Richardson, Texas (Address of principal executive offices)	75080 (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.
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          þ   Accelerated Filer          o   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

There were 35,892,966 shares of the registrant’s common stock outstanding as of October 31, 2007.

FURMANITE CORPORATION AND SUBSIDIARIES

INDEX

		Page
		Number
PART I.	Financial Information	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)	6
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2007 and 2006 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	23
Item 4.	Controls and Procedures	23
PART II.	Other Information	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 6.	Exhibits	24
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I — FINANCIAL INFORMATION

ITEM 1.Financial Statements

FURMANITE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30,			December 31,
	2007			2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	33,124		$	23,937
Accounts receivable, trade (net of allowance for doubtful accounts of $3,900 and $3,341 as of September 30, 2007 and December 31, 2006, respectively)		61,737			59,325
Receivable from businesses distributed to common stockholders		1,443			1,443
Inventories:
Raw materials and supplies		13,456			12,633
Work-in-process		8,976			6,970
Finished goods		1,867			1,808
Prepaid and other current assets		3,979			5,046
Total current assets		124,582			111,162
Property and equipment		59,267			51,523
Less accumulated depreciation and amortization		30,083			25,554
Property and equipment, net		29,184			25,969
Goodwill		13,148			13,148
Other assets		7,250			6,018
Total assets	$	174,164		$	156,297
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	16,718		$	14,702
Accrued expenses and other current liabilities		27,088			22,425
Accrued income taxes		2,901			2,581
Bank overdraft		—			1,553
Current portion of long-term debt		3,142			787
Total current liabilities		49,849			42,048
Long-term debt, less current portion		43,318			48,721
Pension liability		3,166			3,042
Other liabilities		2,057			1,881
Stockholders’ equity:
Common stock, no par value; 60,000,000 shares authorized; 39,852,785 and 39,258,025 shares issued as of September 30, 2007 and December 31, 2006, respectively		4,631			4,558
Additional paid-in capital		127,756			124,884
Retained earnings (accumulated deficit)		(44,351	)		(53,438	)
Accumulated other comprehensive income		5,932			2,921
Treasury stock		(18,194	)		(18,320	)
Total stockholders’ equity		75,774			60,605
Total liabilities and stockholders’ equity	$	174,164		$	156,297

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

3 

FURMANITE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues	$	74,190		$	60,260		$	217,358		$	179,598
Costs and expenses:
Operating costs		47,309			39,114			141,995			116,120
Depreciation and amortization		1,142			808			3,262			2,661
Selling, general and administrative		19,925			22,282			57,316			59,395
Total costs and expenses		68,376			62,204			202,573			178,176
Operating income (loss)		5,814			(1,944	)		14,785			1,422
Interest and other income, net		248			243			624			655
Interest expense		(872	)		(955	)		(2,659	)		(1,981	)
Income (loss) before income taxes		5,190			(2,656	)		12,750			96
Income tax expense		(1,561	)		(652	)		(3,663	)		(2,684	)
Net income (loss)	$	3,629		$	(3,308	)	$	9,087		$	(2,588	)
Earnings (loss) per common share:
Basic	$	0.10		$	(0.10	)	$	0.26		$	(0.08	)
Diluted	$	0.10		$	(0.10	)	$	0.25		$	(0.08	)
Weighted-average number of common and common equivalent shares used in computing net income per common share:
Basic		35,664			34,801			35,392			34,666
Diluted		36,232			34,801			35,890			34,666

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

4

FURMANITE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2007 (Unaudited) and Year Ended December 31, 2006

(in thousands, except share data)

										Retained Earnings			Accumulated Other
	Common Shares							Additional		(Accumulated			Comprehensive
	Issued		Treasury			Common Stock		Paid-In Capital		Deficit)			Income (Loss)			Treasury Stock			Total
Balance at January 1, 2006		38,805,695		4,398,012		$	4,507	$	124,481	$	(50,565	)	$	(7,091	)	$	(20,028	)	$	51,304
Staff Accounting Bulletin No. 108 adjustments		—		—			—		—		997			—			—			997
Revised Balance at January 1, 2006		38,805,695		4,398,012			4,507		124,481		(49,568	)		(7,091	)		(20,028	)		52,301
Net loss		—		—			—		—		(3,432	)		—			—			(3,432	)
Stock based compensation		452,330		(321,049	)		51		403		—			—			1,708			2,162
Minimum pension liability adjustment for subsidiary, net of tax		—		—			—		—		—			2,750			—			2,750
Adjustment to initially apply FASB Statement No. 158, net of tax		—		—			—		—		—			2,129			—			2,129
Adjustment to previously provided tax exposures related to business distributed to common stockholders		—		—			—		—		(438	)		—			—			(438	)
Foreign currency translation adjustment		—		—			—		—		—			5,133			—			5,133
Balance at December 31, 2006		39,258,025		4,076,963			4,558		124,884		(53,438	)		2,921			(18,320	)		60,605
Net income		—		—			—		—		9,087			—			—			9,087
Stock-based compensation		139,139		(28,000	)		18		530		—			—			126			674
Conversion of convertible debentures to common stock		455,621		—			55		2,342		—			—			—			2,397
Foreign currency translation adjustment		—		—			—		—		—			3,011			—			3,011
Balance at September 30, 2007		39,852,785		4,048,963		$	4,631	$	127,756	$	(44,351	)	$	5,932		$	(18,194	)	$	75,774

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

5

FURMANITE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Nine Months
	Ended September 30,
	2007			2006
Operating activities:
Net income (loss)	$	9,087		$	(2,588	)
Reconciliation of net income to net cash used in operating activities:
Depreciation and amortization		3,262			2,661
Stock-based compensation expense		160			132
Provision for doubtful accounts		716			1,895
Deferred income taxes		(720	)		79
Changes in operating assets and liabilities:
Accounts receivable		(3,128	)		(10,738	)
Inventories		(2,888	)		(3,173	)
Prepaid expenses and other current assets		1,067			(69	)
Accounts payable		2,016			(329	)
Accrued expenses		4,663			4,784
Income taxes payable		320			829
Other, net		1,263			(756	)
Net cash provided by (used in) operating activities		15,818			(7,273	)
Investing activities:
Capital expenditures		(5,740	)		(4,019	)
Net cash used in investing activities		(5,740	)		(4,019	)
Financing activities:
Borrowings		—			19,489
Payments on debt		(589	)		(9,066	)
Issuance of common stock		514			1,003
Bank overdraft		(1,553	)		—
Net cash (used in) provided by financing activities		(1,628	)		11,426
Effect of exchange rate changes on cash		737			286
Increase in cash and cash equivalents		9,187			420
Cash and cash equivalents at beginning of period		23,937			21,526
Cash and cash equivalents at end of period	$	33,124		$	21,946

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

6

FURMANITE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2007		2006			2007		2006
Net income (loss)	$	3,629	$	(3,308	)	$	9,087	$	(2,588	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		1,836		(711	)		3,011		646
Total other comprehensive income (loss)		1,836		(711	)		3,011		646
Comprehensive income (loss)	$	5,465	$	(4,019	)	$	12,098	$	(1,942	)

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

7

FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

1. General and Summary of Significant Accounting Policies

On May 17, 2007, Xanser Corporation changed the company’s name to Furmanite Corporation after the company’s shareholders ratified the name change at the annual shareholder meeting. The company’s shares began trading on the New York Stock Exchange under the ticker symbol FRM, effective May 18, 2007, instead of the ticker symbol XNR. The Company’s website also changed from www.xanser.com to www.furmanite.com.

The condensed consolidated interim financial statements include the accounts of Furmanite Corporation (the “Parent Company”) and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with interim financial statements and do not include all disclosures required under accounting principles generally accepted in the United States of America (“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, 2006 as filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments and eliminations, consisting of normal recurring 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.

On November 27, 2000, the Board of Directors of the Company authorized the distribution of its pipeline, terminaling and product marketing business (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. KSL was purchased by Valero L.P. in July 2005 and KSL’s obligations under the Distribution Agreement were assumed by Valero L.P. 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. During the fourth quarter of 2006, the receivable from businesses distributed to common stockholders was further reduced by $0.5 million by adjusting retained earnings for KSL previously provided tax exposures. At September 30, 2007 and December 31, 2006, $1.4 million was recorded as receivable from businesses distributed to common stockholders pursuant to the provisions of the Distribution Agreement.

Change in Presentation

Certain prior year financial statement information related to the presentation of operating costs and expenses and general and administrative expenses have been reclassified to conform with the current presentation that was adopted by the Company for the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Accordingly, general and administrative costs previously included in operating costs and expenses of $21.3 million

8

FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

and $56.3 million for the three and nine months ended September 30, 2006, respectively, were reclassified into general and administrative costs for this Form 10-Q.

Effect of Adopting New Accounting Pronouncements

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. As of January 1, 2007, the Company had recorded $0.9 million of unrecognized tax benefits relating to uncertain tax positions relating to transfer pricing that would impact the effective foreign tax rate if recognized. Approximately $0.2 million of unrecognized tax benefits relate to items that are affected by potentially expiring statutes of limitations within the next 12 months. The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized tax benefits as part of the income tax provision.

The Company and its subsidiaries file numerous consolidated and separate income tax returns in the United States as well as various foreign jurisdictions. The Company’s U.S. federal income tax returns for years 2003 and subsequent years remain subject to examination. Additionally, net operating loss carryforwards originating in 1991, 1992 and 2002 could be subject to examination to the extent of the loss carryforwards. All material foreign income tax matters have been concluded generally for years through 2000.

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 No. 109,Accounting for Income Taxes. As a result, all domestic federal and state income taxes recorded for the nine months ended September 30, 2007 and 2006 are fully offset by a corresponding valuation allowance. The income tax expense recorded for the nine months ended September 30, 2007 and 2006 consists primarily of estimated withholdings and income taxes due in certain foreign jurisdictions of the Company.

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 expenses are not consistent when comparing periods due to the changing income tax mix between domestic and foreign operations and within the foreign operations. In concluding that a full valuation allowance was required, the Company primarily considered such factors as the history of operating losses and the nature of our deferred tax assets.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,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 establishes 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. Pursuant to the provisions of SAB 108, the Company evaluated the effect of the dual approach method as of December 31, 2005 and compared its effect to the roll-over method that the Company historically used. The Company recorded the cumulative effect of adopting SAB 108 as an adjustment to the balance of retained earnings at January 1, 2006. The total adjustment of $1.0 million represents an increase to retained earnings of $0.4 million for foreign deferred tax credits not previously recognized, $0.5 million for a reduction in previously provided foreign tax contingencies and $0.1 million related to a gain on sale of assets, all of which relate to prior periods.

9

FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurement, 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 will adopt SFAS No. 157 in 2008 and is evaluating the potential impact on its consolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This standard is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 159 in 2008 and is evaluating the potential impact on its consolidated financial position, results of operations and cash flow.

2. Earnings Per Share

Basic income per share is calculated as net income divided by the average number of shares of common stock outstanding. Diluted income per share assumes issuance of the net incremental shares from stock options and restricted stock when dilutive. The weighted-average common shares outstanding used to calculate diluted earnings per share reflect the dilutive effect of common stock equivalents, including unvested restricted stock and options to purchase shares of common stock. Diluted weighted-average common shares outstanding and income per share include the following (in thousands, except per share data):

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2007		2006			2007		2006
Net income (loss)	$	3,629	$	(3,308	)	$	9,087	$	(2,588	)
Basic weighted-average common shares outstanding		35,664		34,801			35,392		34,666
Dilutive effect of common stock equivalents		568		—			498		—
Diluted weighted-average common shares outstanding		36,232		34,801			35,890		34,666
Income (loss) per share:
Basic	$	0.10	$	(0.10	)	$	0.26	$	(0.08	)
Dilutive	$	0.10	$	(0.10	)	$	0.25	$	(0.08	)

The Company’s outstanding 8.75% convertible subordinated debentures were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2007 and 2006, because the effects of assumed conversion would be anti-dilutive. Also, 35,000 outstanding options were excluded from the three and nine months ended September 30, 2007 computation of diluted earnings per share due to anti-dilution.

10

FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

3. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2007		2006
Compensation and benefits	$	10,477	$	7,099
Employee expenses, travel and training		503		155
Asset and equipment costs of sales		1,567		1,197
Value added tax payable		1,892		1,563
Taxes other than income		1,766		1,251
Interest		457		477
Professional, audit and legal fees		1,743		1,743
Rent		490		232
Other		8,193		8,708
	$	27,088	$	22,425

4. Long-Term Debt

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

	September 30,		December 31,
	2007		2006
Borrowings under $50,000 revolving bank facility (the “$50.0 million facility”)	$	27,590	$	27,590
Borrowings under $15,000 revolving bank facility (the “$15.0 million facility”)		15,000		15,000
8.75% convertible subordinated debentures due in 2008		2,603		5,000
Capital leases		1,267		1,918
Total long-term debt		46,460		49,508
Less current portion of long-term debt		3,142		787
	$	43,318	$	48,721

Borrowings under the $15.0 million facility bear interest at the option of the borrower at variable rates based on either the LIBOR rate or prime rate (5.9% at September 30, 2007) and are secured by a letter of credit under the $50.0 million facility. The $15.0 million facility contains the same financial and operational covenants as the $50.0 million facility and is without recourse to the Parent Company. At September 30, 2007, the Company was in compliance with all covenants under the $15.0 million facility and there was no unused borrowing capacity under the $15.0 million facility.

The Company is subject to various financial and operational covenants associated with the $50.0 million facility, such as percentage of intangible assets and revenues related to certain geographical areas, ratios of debt to cash flow, as defined in the $50.0 million facility, and cash flow to fixed charges and capital expenditures. Borrowings under the $50.0 million facility bear interest at the option of the borrower at variable rates based on either the LIBOR rate or prime rate (7.1% at September 30, 2007) and have a commitment fee on the unused portion of the $50.0 million facility. The borrowings under the $50.0 million facility are without recourse to the Parent Company. At September 30, 2007, the Company was in compliance with all the covenants under the $50.0 million facility. Considering the outstanding borrowings and letters of credit at September 30, 2007, the Company had unused borrowing capacity of $6.8 million under the $50.0 million facility.

11

FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

The Company’s 8.75% subordinated debentures are convertible into shares of the Company’s common stock at the option of the holder at a conversion price of $5.26 per share. During the three and nine months ended September 30, 2007, $0.9 million and $2.4 million subordinated debentures were converted into 174,134 shares and 455,621 shares, respectively, of the Company’s common stock. The Company’s sinking fund requirements on the subordinated debentures have been paid until their final maturity in 2008.

5. 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 (in thousands):

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2007			2006			2007			2006
Service costs	$	195		$	128		$	513		$	384
Interest costs		1,170			888			3,084			2,664
Expected return on plan assets		(1,342	)		(960	)		(3,540	)		(2,880	)
Amortization of prior service cost		(34	)		(27	)		(90	)		(81	)
Recognized net loss		249			175			657			525
Net periodic pension cost	$	238		$	204		$	624		$	612

Prior to the 2006 adoption of SFAS No. 158,Employers Accounting for Defined Benefit Pension and Other Post Retirement Plans, the Company recognized a pension liability for underfunded plans equal to the excess of the accumulated obligation over plan assets. A corresponding amount was recognized as either an intangible asset, to the extent of previously unrecognized prior service cost, or a reduction of accumulated other comprehensive income included in stockholders’ equity. The incremental effect of the Company’s adoption of SFAS No. 158 was recognition of a liability of $3.0 million, representing the excess projected obligation over fair value as of December 31, 2006. A deferred tax asset of $0.9 million was recognized, which together represents a $2.1 million accumulated other comprehensive income loss as of December 31, 2006.

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: 7.4% overall, 8.5% for equities and 6.0% for bonds. Estimated annual pension plan contributions are assumed to be consistent with the current expected contribution level of $0.9 million for 2007.

6. Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),Share-Based Payment (“SFAS No. 123R”), which replaces SFAS No. 123,Accounting for Stock-Based Compensationand supersedes Accounting Principles Board (“APB”) Opinion 25,Accounting for Stock Issued to Employees. SFAS No. 123R 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 required the Company to recognize compensation expense on a prospective basis and not restate prior period financial statements. 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 previously been included in pro-forma disclosures.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

The Company has one share-based compensation plan, which allows for the issuance of stock options, restricted stock awards and stock appreciation rights. For the nine months ended September 30, 2007 and 2006, the Company recognized total stock-based compensation of $0.2 million and $0.1 million, respectively, with no related tax benefit being realized due to the Company’s current domestic tax position related to net operating loss carryforwards. For the three months ended September 30, 2007 and 2006, the Company recognized $0.1 million and less than $0.1 million in stock-based compensation, respectively. The Company uses authorized but unissued shares of common stock for stock option exercises and issuance of restricted stock pursuant to the Company’s share based compensation plan and treasury stock for issuances outside of the plan.

7. Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at amounts that reasonably approximate their fair values. The current values of the Company’s long-term debt and 8.75% subordinated debentures approximate their fair values based on the Company’s incremental borrowing rates for similar types of borrowing arrangements. The Company has no derivative financial instruments.

8. 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 an undiscounted reserve for environmental liabilities related to site contamination for properties in the United States in the amount of $1.9 million at September 30, 2007 and December 31, 2006.

A subsidiary of the Company is involved in two disputes with customers in connection with indemnification claims arising from enforcement actions between the customers and a governmental regulatory agency. In July 2007, a customer, The Premcor Refining Group Inc., initiated legal action against the subsidiary alleging that the subsidiary, Furmanite America, Inc., and one of its former employees, which performed data services at one of the customer’s facilities, failed to provide the customer with adequate and timely information supporting the subsidiary’s work at the customer’s facility during the fourth quarter of 2002 and the first quarter of 2003. While the subsidiary only worked in a small defined area at one of the three facilities owned by the customer that relate to a civil settlement with the governmental regulatory agency, the customer’s complaint seeks damages in an amount that the subsidiary believes represents the total $4.25 million amount of the civil settlement for all three facilities plus the customer’s agreement to spend no less than $4.25 million in supplemental environmental projects to reduce air emissions that relates to all three facilities and also seeks unspecified punitive damages. Discovery has begun, and a trial date of October 14, 2008 has been set in the Common Pleas Court of Allen County, Ohio. A different customer, which is negotiating with the governmental regulatory agency and has not initiated legal action against the subsidiary, claims that the subsidiary and one of its ex-employees failed to provide the customer with satisfactory data services at one of the customer’s facilities. The subsidiary believes that it provided each of these customers with adequate and timely information supporting the subsidiary’s work at the customers’ facility and will vigorously defend against the customers’ claims. The Company cannot make an assessment of the probable outcome of these matters or determine the extent, if any, of any potential uninsured liability or damage.

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, results of operations or liquidity of the Company.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

9. Business Segment Data

Due to the insignificance of the government and other services segment, the Company is no longer presenting segment information. Previously, the Company showed two segments: technical services and government and other services. The technical services segment provided technical services to an international client base that included refineries, chemical plants, pipelines, offshore drilling and production platforms, steel mills, food and drink processing facilities, power generation, and other flow process industries. Government and other services provided consulting services, hardware sales and other related information management and processing services to healthcare, governmental, insurance and financial institutions.

The following geographical area data includes revenues by major service line and operating income (loss) based on the location of the operations (in thousands):

	United					Asia-
	States			Europe		Pacific		Total
Three Months Ended September 30, 2007:
Under pressure services	$	12,110		$	10,024	$	2,865	$	24,999
Turnaround services		11,959			18,633		4,931		35,523
Other services		7,260			5,827		581		13,668
Total revenues	$	31,329		$	34,484	$	8,377	$	74,190
Operating income (loss)	$	(1,451	)	$	5,245	$	2,020	$	5,814
Three Months Ended September 30, 2006:
Under pressure services	$	11,135		$	7,245	$	1,570	$	19,950
Turnaround services		6,721			17,094		3,503		27,318
Other services		6,922			5,305		765		12,992
Total revenues	$	24,778		$	29,644	$	5,838	$	60,260
Operating income (loss)	$	(7,399	)	$	4,458	$	997	$	(1,944	)
Nine months Ended September 30, 2007:
Under pressure services	$	36,596		$	25,664	$	6,837	$	69,097
Turnaround services		40,571			56,820		14,494		111,885
Other services		19,417			15,325		1,634		36,376
Total revenues	$	96,584		$	97,809	$	22,965	$	217,358
Operating income (loss)	$	(2,284	)	$	12,322	$	4,747	$	14,785
Nine months Ended September 30, 2006:
Under pressure services	$	31,538		$	21,927	$	4,388	$	57,853
Turnaround services		27,575			46,189		10,131		83,895
Other services		20,289			15,602		1,959		37,850
Total revenues	$	79,402		$	83,718	$	16,478	$	179,598
Operating income (loss)	$	(12,764	)	$	11,255	$	2,931	$	1,422

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

The following geographical area data includes net property and equipment based on physical location (in thousands):

	September 30,		December 31,
	2007		2006
United States	$	16,147	$	14,763
Europe		10,403		9,624
Asia-Pacific		2,634		1,582
	$	29,184	$	25,969

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

On May 17, 2007, Xanser Corporation changed the company’s name to Furmanite Corporation after the company’s shareholders ratified the name change at the annual shareholder meeting. The company’s shares began trading on the New York Stock Exchange under the ticker symbol FRM, effective May 18, 2007, instead of the ticker symbol XNR. The Company’s website also changed from www.xanser.com to www.furmanite.com.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto of Furmanite Corporation (the “Company”) included in Item 1 of this Quarterly Report on Form 10-Q.

Business Overview

The Company conducts its principal business through subsidiaries in the technical services industry.

The Company’s technical services business, which is conducted through Furmanite Worldwide, Inc. and its domestic and international subsidiaries and affiliates (collectively, “Furmanite”), offers specialized technical services to an international base of clients located in the United Kingdom, Continental Europe, North America, Latin America and Asia-Pacific. This business provides on-line repairs of leaks in valves, pipes and other components of piping systems and related equipment, typically in the flow-process industries. Other services provided include on-site machining, bolting and valve testing and repair on such systems and equipment. In addition, the business provides hot tapping, fugitive emissions monitoring, passive fire protection, concrete repair and heat exchanger repair.

On December 31, 2005, Furmanite entered into an Asset Purchase Agreement (“Acquisition Agreement”) with Flowserve US Inc. (together with its affiliates IPSCO (UK) Limited, Flowserve Repair & Services B.V., Flowserve Management Company and Flowserve Belgium N.V. (collectively, “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 related to site contamination at the properties in the United States. 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. The transaction was consummated as of the close of business on December 31, 2005.

Financial Overview

The Company’s net income for the nine months ended September 30, 2007 increased $11.7 million from the nine months ended September 30, 2006. For the quarter ended September 30, 2007, net income increased $6.9 million as compared to 2006. Revenues increased 21% from $179.6 million for the first nine months of 2006 to $217.4 million for the first nine months of 2007 and 23% from $60.3 million in the third quarter of 2006 to $74.2 million in 2007. The increase is in revenue is partially due to the introduction of heat treatment services and the continued demand for the Company’s specialty services such as bolting, heat exchanger repair and leak sealing. These increases in revenue combined with the decrease in selling, general and administrative costs such as bad debt reserves, legal settlement and the reduction in workforce in the government related business along with the integration costs incurred in 2006 combined to have a favorable outcome on net income for the nine months ended September 30, 2007. The Company’s diluted earnings (loss) per share for the nine months ended September 30, 2007 was $0.25 as compared to $(0.08) for the nine months ended September 30, 2006. The third quarter diluted earnings (loss) per share was $0.10 in 2007 as compared to $(0.10) in 2006.

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Results of Operations

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2007			2006			2007			2006
	(in thousands, except per share data)
Revenues	$	74,190		$	60,260		$	217,358		$	179,598
Costs and expenses:
Operating costs		47,309			39,114			141,995			116,120
Depreciation and amortization		1,142			808			3,262			2,661
Selling, general and administrative		19,925			22,282			57,316			59,395
Total costs and expenses		68,376			62,204			202,573			178,176
Operating income (loss)		5,814			(1,944	)		14,785			1,422
Interest and other income, net		248			243			624			655
Interest expense		(872	)		(955	)		(2,659	)		(1,981	)
Income (loss) before income taxes		5,190			(2,656	)		12,750			96
Income tax expense		(1,561	)		(652	)		(3,663	)		(2,684	)
Net income (loss)	$	3,629		$	(3,308	)	$	9,087		$	(2,588	)
Earnings (loss) per share:
Basic	$	0.10		$	(0.10	)	$	0.26		$	(0.08	)
Diluted	$	0.10		$	(0.10	)	$	0.25		$	(0.08	)

Revenues

For the third quarter of 2007, consolidated revenues increased by $13.9 million, or 23%, when compared to the same 2006 period. The $13.9 million increase in revenues consists of a $6.6 million increase from the United States, a $4.8 million increase from Europe and a $2.5 million increase from Asia-Pacific. These overall increases are attributable to the service lines of the Company such as underpressure services and turnaround services. The United States increase in revenue is due to onsite machining, bolting, leak sealing and safety valve repair. The increase in Europe is attributable to increases in onsite machining, heat exchanger repair and leak sealing. The Asia-Pacific increase is comprised of onsite machining and hot tapping. Also, the favorable currency exchange rates from Europe and Asia-Pacific between the third quarter of 2006 and 2007 accounted for $2.4 million and $0.7 million, respectively, of the increase in revenues from the third quarter of 2006 to the third quarter of 2007.

For the nine months ended September 30, 2007, consolidated revenues increased by $37.8 million, or 21%, when compared to the nine months ended September 30, 2006. The $37.8 million increase in revenues consists of a $17.2 million increase from the United States, a $14.1 million increase from Europe and a $6.5 million increase from Asia-Pacific. These overall increases are attributable to the service lines of the Company such as underpressure services and turnaround services. The United States increase in revenue is due to leak sealing, onsite machining, bolting, heat treatment and safety valve repair. The increase in Europe is attributable to increases in leak sealing, composite repair, onsite machining and heat exchanger repair. The Asia-Pacific increase is comprised of onsite machining and hot tapping. Also, the favorable currency exchange rates from Europe and Asia-Pacific between years accounted for $7.3 million and $1.7 million, respectively, of the increase in revenues from 2006 to 2007.

Operating Costs

Operating costs increased 21% from $39.1 million in the third quarter of 2006 to $47.3 million in the third quarter of 2007. The $8.2 million increase in operating costs was attributable to a $3.9 million increase in the United States, a $3.3 million increase in Europe and a $1.0 million increase in Asia-Pacific due to an overall increase in labor costs and benefits, supplies and materials, equipment repairs and maintenance and vehicle costs which

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correlate with the increase in revenues discussed above. The increase in Europe was from an increase in labor and benefits and supplies and materials. The increase in the United States was due to increased labor and benefit costs, materials and supplies and vehicle costs. The increase in operating costs for Asia-Pacific was due to labor and benefit costs and equipment rental. Currency exchange rate differences from Europe and Asia-Pacific accounted for $1.5 million and $0.4 million, respectively, of the increase in operating costs from the third quarter of 2006 to third quarter of 2007.

Operating costs increased 22% from $116.1 million for the nine months ended September 30, 2006 to $142.0 million for the nine months ended September 30, 2007. The $25.9 million increase in operating costs was attributable to a $12.0 million increase in the United States, a $10.3 million increase in Europe and a $3.6 million increase in Asia-Pacific due to an overall increase in labor costs and benefits, supplies and materials, equipment repairs and maintenance and vehicle costs which correlate to the increase in revenues discussed above. The increase in the United States was due to increased labor and benefit costs, materials and supplies and vehicle costs. The increase in Europe was from an increase in labor and benefits, supplies and materials, equipment rental, equipment repairs and maintenance, and vehicle costs. The increase in operating costs for Asia-Pacific was due to labor and benefit costs, equipment rental, supplies and materials. Currency exchange rate differences from Europe and Asia-Pacific accounted for $4.8 million and $1.0 million, respectively, of the increase in operating costs from 2006 to 2007.

Selling, General and Administrative

Selling, general and administrative expenses decreased 11% from $22.3 million in the third quarter of 2006 to $19.9 million in the third quarter of 2007. The $2.4 million decrease is due to a combined $0.8 million increase in Europe, $0.5 million of which is due to the effect of the currency exchange rates, and $0.5 million increase in Asia-Pacific, $0.1 million of which is due to the effect of the currency exchange rates, offset by a $3.7 million decrease in the United States. The major increase in selling, general and administrative costs in Europe was attributable to labor and benefits and professional services. The increase in Asia-Pacific was attributable to labor and benefits. The United States decrease in selling, general and administrative costs was due to a decrease in bad debt and legal expenses coupled with a reduction in workforce in the government related business plus a decrease in legal expenses in 2007 and the $1.2 million integration costs associated with the GSG acquisition in 2006 for the Furmanite operations. The increase in labor and benefits supports the increase in quarterly revenues as discussed above.

Selling, general and administrative expenses decreased 4% from $59.4 million for the nine months ended September 30, 2006 to $57.3 million for the nine months ended September 30, 2007. The decrease is due to a combined $2.7 million increase in Europe, $1.6 million of which is due to the effect of the currency exchange rates, and $1.0 million increase in Asia-Pacific, $0.3 million of which is due to the effect of the currency exchange rates, with a $5.8 million decrease in the United States. The major increase in selling, general and administrative costs in Europe was attributable to labor and benefits and professional services. The increase in Asia-Pacific was attributable to labor and benefits. The United States contributed a decrease in selling, general and administrative costs due to a decrease in bad debt reserves, legal expenses and a reduction in workforce in the government related business along with a legal settlement award received in the second quarter of 2007. The decrease in selling, general and administrative costs was also attributable to the $3.0 million integration costs incurred in 2006 related to the GSG acquisition. The overall increase in labor and benefits supports the increase in yearly revenue as discussed above.

Depreciation and Amortization

Depreciation and amortization expense increased $0.3 million and $0.6 million from the third quarter and first nine months of 2007 as compared to the comparable periods of 2006, respectively, due to the depreciation and amortization related to the $7.2 million of capital expenditures for the year ended 2006 and to a lesser degree the $5.7 million capital expenditures placed in service during the nine months ended September 30, 2007.

Interest Expense

For the three and nine months ended September 30, 2007, consolidated interest expense decreased by $0.1 million and increased by $0.7 million, respectively, when compared to the same 2006 periods. The increase in interest expense from

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FURMANITE CORPORATION AND SUBSIDIARIES

2006 to 2007 is due to the additional borrowings for working capital requirements in 2006 combined with the slight increase in interest rates from 2006 to 2007. The decrease in interest expense for the third quarter of 2007 as compared to the third quarter of 2006 is due to the conversion of $2.4 million of the Company’s 8.75% subordinated debentures into 455,621 shares of the Company’s common stock during the nine months ended September 30, 2007. During the third quarter of 2007, $0.9 million of the 8.75% convertible debentures was converted into 174,134 shares of the Company’s common stock. These conversions have resulted in lower interest expense for the third quarter of 2007.

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 No. 109,Accounting for Income Taxes. As a result, all domestic federal and state income taxes recorded for the three and nine months ended September 30, 2007 and 2006 are fully offset by a corresponding valuation allowance. The income tax expense recorded for the three and nine months ended September 30, 2007 and 2006 consists primarily of estimated withholdings and income taxes due in certain foreign jurisdictions of the Company.

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 expenses are not consistent when comparing periods due to the changing income tax mix between domestic and foreign operations and within the foreign operations. In concluding that a full valuation allowance was required, the Company primarily considered such factors as the history of operating losses and the nature of our deferred tax assets.

As part of the adoption of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”), the Company has elected to include interest expense on underpayments of income taxes and accrued penalties related to unrecognized tax benefits as part of the income tax provision.

Liquidity and Capital Resources

Net cash provided by operating activities was $15.8 million for the nine months ended September 30, 2007 as compared to net cash used of $7.3 million for the nine months ended September 30, 2006. The change in net cash from operating activities was due primarily to an increase in net income of $11.7 million offset by non-cash income statement adjustments of $1.3 million. The change in net cash was also due to continued increases in accounts receivable and accounts payable with a net change of $10.0 million. These increases are due to the growth in revenue and associated increase in operating expenses.

Net cash used in investing activities totaled $5.7 million and $4.0 million for the nine months ended September 30, 2007 and 2006, respectively. The increase in cash used is due to the increase in capital expenditures from 2006 to 2007.

Capital expenditures were $5.7 million and $4.0 million for the nine months ended September 30, 2007 and 2006, respectively. Consolidated capital expenditures for the year 2007 have been budgeted at $5.0 million to $7.0 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, without limitation, demand for services as well as local, state and federal government regulation. No assurance can be given that required capital expenditures will not exceed anticipated amounts during 2007 or thereafter. Future capital expenditures are expected to be funded from existing cash and anticipated cash flows from operations.

Net cash used in financing activities was $1.6 million as compared to net cash provided of $11.4 million for the nine months ended September 30, 2007 and 2006, respectively. The Company had debt payments of $0.6 million in the first nine months of 2007 related to the capital leases and net borrowings of $10.4 million in the first nine months of 2006 due to the working capital needs of the operations acquired in the GSG acquisition. Additionally, the Company received $0.5 million and $1.0 million in the first nine months of 2007 and 2006, respectively, for common stock issued upon the exercise of options. These items were offset in the first nine months of 2007 by the elimination of the $1.6

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million bank overdraft that existed at December 31, 2006.

At September 30, 2007, $27.6 million was outstanding under the $50.0 million facility and bears interest at a rate of 7.1%. The $50.0 million facility and $15.0 million facility provide working capital for the Company and are without recourse to Furmanite Corporation (the “Parent Company”). Borrowings under the $50.0 million facility bear interest at the option of the borrower at variable rates based on either the LIBOR rate or prime rate. The $50.0 million facility includes a commitment fee on the unused portion of the facility and contains certain financial and operational covenants, including percentage of tangible assets and revenues related to certain geographical areas, ratios of debt to cash flow, as defined in the agreements, and cash flow to fixed charges and capital expenditures. At September 30, 2007, the Company was in compliance with all covenants. The $50.0 million facility matures in January 2010 and is secured by substantially all of the tangible assets of Furmanite.

At September 30, 2007, $15.0 million was outstanding under the $15.0 million facility which bears interest at a rate of 5.9% based on either LIBOR or prime rate at the option of the borrower. The $15.0 million facility contains the same financial and operational covenants as the $50.0 million facility and is without recourse to the Parent Company. At September 30, 2007, the Company was in compliance with all covenants under the $15.0 million facility.

The Parent Company’s $2.6 million 8.75% subordinated debentures outstanding at September 30, 2007 are convertible into shares of the Company’s common stock at the option of the holder at the conversion price of $5.26 per share. These subordinated debentures mature in January 2008 and interest payments are due semi-annually in July and January. As of September 30, 2007, $2.4 million of the subordinated debentures had been converted into 455,621 shares of the Company’s common stock.

As of September 30, 2007, the Company has recorded $1.1 million of unrecognized tax benefits relating to uncertain tax positions relating to transfer pricing that would impact the effective foreign tax rate if recognized. At September 30, 2007, approximately $0.2 million of unrecognized tax benefits related to items that are affected by potentially expiring statutes of limitations within the next 12 months.

On November 27, 2000, the Board of Directors of the Company authorized the distribution of its pipeline, terminaling and product marketing business (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. KSL was purchased by Valero L.P. in July 2005 and KSL’s obligations under the Distribution Agreement were assumed by Valero L.P. 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. During the fourth quarter of 2006, the receivable from businesses distributed to common stockholders was further reduced by $0.5 million by adjusting retained earnings for KSL previously provided tax exposures. At September 30, 2007 and December 31, 2006, $1.4 million was recorded as receivable from businesses distributed to common stockholders pursuant to the provisions of the Distribution Agreement.

The Company does not anticipate paying any dividends as it believes that investing those dollars back into the Company will provide a better long-term return to shareholders in increased per share value. The Company believes that funds

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FURMANITE CORPORATION AND SUBSIDIARIES

generated from operations, together with existing cash and available credit under the $50.0 million facility will be sufficient for the conversion of the subordinated debentures due January 2008 and to finance current operations, 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 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and in the Notes to the Consolidated Financial Statements presented under Item 1 of this Quarterly Report on Form 10-Q.

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 most critical accounting policies pertain to revenue recognition, allowance for doubtful accounts, the impairment of goodwill and income taxes. Critical accounting policies are discussed regularly, at least quarterly, with the Company’s Audit Committee.

At September 30, 2007, 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. Based on evaluations performed by the Company pursuant to SFAS No. 109,Accounting for Income Taxes, the Company has recorded a non-cash valuation allowance of $25.4 million with respect to the Company’s federal and state net deferred tax assets. The utilization of net operating loss carryforwards could be subject to limitation in the event of a change in ownership, as defined in the tax laws. 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 Pronouncements

The Company adopted the provisions of FIN 48,Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109, on January 1, 2007. As of January 1, 2007, the Company had recorded $0.9 million of unrecognized tax benefits relating to uncertain tax positions relating to transfer pricing that would impact the effective foreign tax rate if recognized. Approximately $0.2 million of unrecognized tax benefits related to items that are affected by potentially expiring statutes of limitations within the next 12 months. The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized tax benefits as part of the income tax provision.

The Company and its subsidiaries file numerous consolidated and separate income tax returns in the United States as well as various foreign jurisdictions. The Company’s U.S. federal income tax returns for year 2003 and subsequent years remain subject to examination. Additionally, net operating loss carryforwards originating in 1991, 1992 and 2002 could be subject to examination to the extent of the loss carryforwards. All material foreign income tax matters have been concluded generally for years through 2000.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,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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SAB 108 establishes 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. Pursuant to the provisions of SAB 108, the Company evaluated the effect of the dual approach method as of December 31, 2005 and compared its effect to the roll-over method that the Company historically used. The Company recorded the cumulative effect of adopting SAB 108 as an adjustment to the balance of retained earnings at January 1, 2006. The total adjustment of $1.0 million represents an increase to retained earnings of $0.4 million for foreign deferred tax credits not previously recognized, $0.5 million for a reduction in previously provided foreign tax contingencies and $0.1 million related to a gain on sale of assets, all of which relate to prior periods.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurement, 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 will adopt SFAS No. 157 in 2008 and is evaluating the potential impact on its consolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This standard is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 159 in 2008 and is evaluating the potential impact on its consolidated financial position, results of operations and cash flow.

Off-Balance Sheet Transactions

The Company was not a party to any off-balance sheet transactions at September 30, 2007, or for the nine months ended September 30, 2007.

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FURMANITE CORPORATION AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The principal market risks (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 amount of variable rate debt, $42.6 million at September 30, 2007, a one percent increase in interest rates would increase annual interest expense by approximately $0.4 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 operations of the Company in Australia, Belgium, China, France, Germany, Malaysia, the Netherlands, New Zealand, Norway, Singapore and the United Kingdom. There have been no significant changes in foreign currency market risks since December 31, 2006.

Item 4. Controls and Procedures

The Company’s principal executive officer and principal financial officer, after evaluating, as of September 30, 2007, 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 for the purpose of ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Act (15 U.S.C 78aet seq.) is recorded, processed, summarized and reported, within the time periods specified by the 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.

During the quarter ended September 30, 2007, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially 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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FURMANITE CORPORATION AND SUBSIDIARIES

Part II — Other Information

Item 1. Legal Proceedings

A subsidiary of the Company is involved in two disputes with customers in connection with indemnification claims arising from enforcement actions between the customers and a governmental regulatory agency. In July 2007, a customer, The Premcor Refining Group Inc., initiated legal action against the subsidiary alleging that the subsidiary, Furmanite America, Inc., and one of its former employees, which performed data services at one of the customer’s facilities, failed to provide the customer with adequate and timely information supporting the subsidiary’s work at the customer’s facility during the fourth quarter of 2002 and the first quarter of 2003. While the subsidiary only worked in a small defined area at one of the three facilities owned by the customer that relate to a civil settlement with the governmental regulatory agency, the customer’s complaint seeks damages in an amount that the subsidiary believes represents the total $4.25 million amount of the civil settlement for all three facilities plus the customer’s agreement to spend no less than $4.25 million in supplemental environmental projects to reduce air emissions that relates to all three facilities and also seeks unspecified punitive damages. Discovery has begun, and a trial date of October 14, 2008 has been set in the Common Pleas Court of Allen County, Ohio. A different customer, which is negotiating with the governmental regulatory agency and has not initiated legal action against the subsidiary, claims that the subsidiary and one of its ex-employees failed to provide the customer with satisfactory data services at one of the customer’s facilities. The subsidiary believes that it provided each of these customers with adequate and timely information supporting the subsidiary’s work at the customers’ facility and will vigorously defend against the customers’ claims. The Company cannot make an assessment of the probable outcome of these matters or determine the extent, if any, of any potential uninsured liability or damage.

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, either individually or in the aggregate, will not have a materially adverse effect on the financial position, results of operations or liquidity of the Company.

Item 1A. Risk Factors

There have been no material changes to the risk factors presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 6. Exhibits

3.1	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.
3.2	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.
3.3	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.
3.4	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.
3.5	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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FURMANITE CORPORATION AND SUBSIDIARIES

3.6	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.
3.7	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.
3.8	Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated May 17, 2007, filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on June 20, 2007, which exhibit is hereby incorporated by reference.
3.9	By-laws of the Registrant, as amended and restated June 14, 2007, filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 20, 2007, which exhibit is 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 Form 10-K for the year ended December 31, 1998, which exhibit is incorporated herein by reference.
4.2	Indenture between Moran Energy Inc. (“Moran”) and First City National Bank of Houston (“First City”), dated January 15, 1984, under which Moran issued the 8 3/4% Convertible Subordinated Debentures due 2008, filed as Exhibit 4.1 to Moran’s Registration Statement on Form S-3 (SEC File No. 2-81227), which exhibit is hereby incorporated by reference.
4.3	First Supplemental Indenture between the Registrant and First City, dated as of March 20, 1984, under which the Registrant assumed obligations under the Indenture listed as Exhibit 4.2 above, filed as Exhibit 4.7 of the Registrant’s Form 10-K for the year ended December 31, 1983, which exhibit is hereby incorporated by reference.
31.1	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 8, 2007.
31.2	Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 8, 2007.
32.1	Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated November 8, 2007.
32.2	Certification of Chief Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated November 8, 2007.

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/ HOWARD C. WADSWORTH  

Howard C. Wadsworth 

Sr. Vice President, Treasurer and Secretary (Duly Authorized Officer) 

Date: November 8, 2007

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