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10-Q 1 d539815d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2013

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

for the transition period from to

Commission File Number 001-05083

FURMANITE CORPORATION

(Exact name of registrant as specified in its charter)


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

10370 Richmond Avenue Suite 600 Houston, Texas		77042
(Address of principal executive offices)		(Zip Code)

(713) 634-7777

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 37,416,566 shares of the registrant’s common stock outstanding as of July 29, 2013.

FURMANITE CORPORATION AND SUBSIDIARIES

INDEX


		Page Number
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		3
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012		4
Consolidated Income Statements for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)		5
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)		6
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2013 (unaudited) and for the Year Ended December 31, 2012		7
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)		8
Notes to Consolidated Financial Statements (unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
Item 4. Controls and Procedures		36

PART II. Other Information
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 6. Exhibits		38

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) may contain forward-looking statements within the meaning of sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Report, including, but not limited to, statements regarding the Company’s future financial position, business strategy, budgets, projected costs, savings and plans, and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. The Company bases its forward-looking statements on reasonable beliefs and assumptions, current expectations, estimates and projections about itself and its industry. The Company cautions that these statements are not guarantees of future performance and involve certain risks and uncertainties that cannot be predicted. In addition, the Company based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate and actual results may differ materially from those expressed or implied by the forward-looking statements. One is cautioned not to place undue reliance on such statements, which speak only as of the date of this Report. Unless otherwise required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances, or otherwise.

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2013			December 31, 2012
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	24,688		$	33,185
Accounts receivable, trade (net of allowance for doubtful accounts of $1,275 and $1,648 as of June 30, 2013 and December 31, 2012, respectively)		93,111			77,042
Inventories:
Raw materials and supplies		23,668			23,146
Work-in-process		11,485			8,449
Finished goods		214			116
Deferred tax assets, current		3,477			7,612
Prepaid expenses and other current assets		5,818			7,743

Total current assets		162,461			157,293
Property and equipment		98,143			93,375
Less: accumulated depreciation and amortization		(52,876	)		(51,132	)

Property and equipment, net		45,267			42,243
Goodwill		15,524			15,524
Deferred tax assets, non-current		4,908			5,276
Intangible and other assets, net		13,661			11,292

Total assets	$	241,821		$	231,628


Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	1,360		$	2,190
Accounts payable		21,095			21,595
Accrued expenses and other current liabilities		28,686			25,728
Income taxes payable		872			926

Total current liabilities		52,013			50,439
Long-term debt, non-current		41,045			39,609
Net pension liability		17,089			18,536
Other liabilities		4,253			3,965

Commitments and contingencies (Note 12)

Stockholders’ equity:
Series B Preferred Stock, unlimited shares authorized, none outstanding		—			—
Common stock, no par value; 60,000,000 shares authorized; 41,425,529 and 41,329,538 shares issued as of June 30, 2013 and December 31, 2012, respectively		4,795			4,783
Additional paid-in capital		135,226			134,521
Retained earnings		21,727			12,402
Accumulated other comprehensive loss		(16,314	)		(14,614	)
Treasury stock, at cost (4,008,963 shares)		(18,013	)		(18,013	)

Total stockholders’ equity		127,421			119,079

Total liabilities and stockholders’ equity	$	241,821		$	231,628

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share data)

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Revenues	$	108,376		$	85,928		$	197,414		$	157,710
Costs and expenses:
Operating costs (exclusive of depreciation and amortization)		71,697			58,326			134,428			110,678
Depreciation and amortization expense		2,679			1,964			5,508			3,989
Selling, general and administrative expense		22,376			20,835			41,776			38,991

Total costs and expenses		96,752			81,125			181,712			153,658

Operating income		11,624			4,803			15,702			4,052
Interest income and other income (expense), net		(181	)		(72	)		148			(200	)
Interest expense		(278	)		(197	)		(556	)		(598	)

Income before income taxes		11,165			4,534			15,294			3,254

Income tax expense		(4,404	)		(2,690	)		(5,969	)		(2,240	)

Net income	$	6,761		$	1,844		$	9,325		$	1,014


Earnings per common share:
Basic	$	0.18		$	0.05		$	0.25		$	0.03
Diluted	$	0.18		$	0.05		$	0.25		$	0.03

Weighted-average number of common and common equivalent shares used in computing earnings per common share:
Basic		37,402			37,253			37,372			37,229
Diluted		37,552			37,342			37,521			37,357

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Net income	$	6,761		$	1,844		$	9,325		$	1,014
Other comprehensive income (loss) before tax:
Defined benefit pension plans:
Prior service cost arising during period		(46	)		(57	)		(117	)		(91	)
Net gain arising during period		325			597			2,099			284
Less: Amortization of prior service cost included in net periodic pension cost		23			24			47			48

Defined benefit pension plans, net		302			564			2,029			241
Unrealized gain on interest rate swap		503			—			503			—
Foreign currency translation adjustments		(1,273	)		(1,404	)		(3,543	)		251

Total other comprehensive income (loss) before tax		(468	)		(840	)		(1,011	)		492
Income tax expense related to components of other comprehensive income (loss)		(274	)		(142	)		(689	)		(61	)

Other comprehensive income (loss), net of tax		(742	)		(982	)		(1,700	)		431

Comprehensive income	$	6,019		$	862		$	7,625		$	1,445

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2013 (Unaudited) and Year Ended December 31, 2012

(in thousands, except share data)


	Common Shares				Common		Additional Paid-In		Retained		Accumulated Other Comprehensive			Treasury			Total
	Issued		Treasury		Stock		Capital		Earnings		Loss			Stock			Total
Balances at January 1, 2012		41,140,538		4,008,963	$	4,765	$	133,062	$	11,597	$	(12,522	)	$	(18,013	)	$	118,889
Net income		—		—		—		—		805		—			—			805
Stock-based compensation and stock option exercises		189,000		—		18		1,459		—		—			—			1,477
Change in pension net actuarial loss and prior service credit, net of tax		—		—		—		—		—		(4,329	)		—			(4,329	)
Foreign currency translation adjustment		—		—		—		—		—		2,237			—			2,237

Balances at December 31, 2012		41,329,538		4,008,963	$	4,783	$	134,521	$	12,402	$	(14,614	)	$	(18,013	)	$	119,079

Net income		—		—		—		—		9,325		—			—			9,325
Stock-based compensation, stock option exercises and vesting of restricted stock		95,991		—		12		705		—		—			—			717
Change in pension net actuarial loss and prior service credit, net of tax		—		—		—		—		—		1,541			—			1,541
Unrealized gain on interest rate swap, net of tax		—		—		—		—		—		302			—			302
Foreign currency translation adjustment		—		—		—		—		—		(3,543	)		—			(3,543	)

Balances at June 30, 2013		41,425,529		4,008,963	$	4,795	$	135,226	$	21,727	$	(16,314	)	$	(18,013	)	$	127,421

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

FURMANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2013			2012
Operating activities:
Net income	$	9,325		$	1,014
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization		5,508			3,989
Provision for doubtful accounts		38			1,169
Stock-based compensation expense		624			539
Deferred income taxes		4,048			1,213
Other, net		163			252
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(16,252	)		(9,066	)
Inventories		(3,759	)		(5,149	)
Prepaid expenses and other current assets		706			1,967
Accounts payable		(593	)		2,355
Accrued expenses and other current liabilities		2,531			3,177
Income taxes payable		226			(1,334	)
Other, net		(65	)		229

Net cash provided by operating activities		2,500			355

Investing activities:
Capital expenditures		(6,818	)		(3,309	)
Acquisition of businesses		(905	)		(9,259	)
Proceeds from sale of assets		30			108

Net cash used in investing activities		(7,693	)		(12,460	)

Financing activities:
Payments on debt		(2,227	)		(32,714	)
Proceeds from issuance of debt		—			39,300
Debt issuance costs		—			(595	)
Issuance of common stock		93			416

Net cash (used in) provided by financing activities		(2,134	)		6,407

Effect of exchange rate changes on cash		(1,170	)		(93	)


Decrease in cash and cash equivalents		(8,497	)		(5,791	)
Cash and cash equivalents at beginning of period		33,185			34,524

Cash and cash equivalents at end of period	$	24,688		$	28,733


Supplemental cash flow information:
Cash paid for interest	$	473		$	402
Cash paid for income taxes, net of refunds received	$	1,740		$	2,488

Non-cash investing and financing activities:
Issuance of notes payable to equity holders related to acquisition of businesses	$	2,801		$	—
Receivable for stock options exercise	$	—		$	126

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

FURMANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

(Unaudited)

1. General and Summary of Significant Accounting Policies

General

The consolidated interim financial statements include the accounts of Furmanite Corporation (the “Parent Company”) and its subsidiaries (collectively, the “Company” or “Furmanite”). All intercompany transactions and balances have been eliminated in consolidation. These unaudited consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnote disclosures required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) and accruals, necessary for a fair presentation of the financial statements, have been made. Interim results of operations are not necessarily indicative of the results that may be expected for the full year.

Revenue Recognition

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

Revenues are recognized using the completed-contract method, when persuasive evidence of an arrangement exists, services to customers have been rendered or products have been delivered, the selling price is fixed or determinable and collectability is reasonably assured. Revenues are recorded net of sales tax. Substantially all projects are short term in nature; however, the Company occasionally enters into contracts that are longer in duration that represent multiple element arrangements, which include a combination of services and products. The Company separates deliverables into units of accounting based on whether the deliverables have standalone value to the customer. The arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price generally determined using vendor specific objective evidence. Revenues are recognized for the separate units of accounting when services to customers have been rendered or products have been delivered and risk of ownership has passed to the customer. The Company provides limited warranties to customers, depending upon the service performed. Warranty claim costs were not material during either of the three or six months ended June 30, 2013 or 2012.

Inventories

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

Operating Costs

Operating costs include direct and indirect labor along with related fringe benefits, materials, freight, travel, engineering, vehicles, equipment rental and restructuring charges, and are expensed when the associated revenue is recognized or as incurred. Direct costs related to projects for which the earnings process have not been completed and therefore not qualifying for revenue recognition are recorded as work-in-process inventory.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include payroll and related fringe benefits, marketing, travel, rent, information technology, insurance, professional fees and restructuring charges, and are expensed as incurred.

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected further tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect on deferred income taxes of a change in tax rates is recognized as an income tax expense or benefit in the period when the change is enacted.

Based on consideration of all available evidence regarding their utilization, net deferred tax assets are recorded to the extent that it is more likely than not that they will be realized. Where, based on the weight of all available evidence, it is more likely than not that some amount of a deferred tax asset will not be realized, a valuation allowance is established for that amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. In concluding whether a valuation allowance on domestic federal, state or foreign income taxes is required, the Company considers all relevant factors, including the history of operating income and losses, future taxable income and the nature of the deferred tax assets.

Income tax expense differs from the expected tax at statutory rates due primarily to changes in valuation allowances for certain deferred tax assets and different tax rates in the various foreign jurisdictions. Additionally, the aggregate tax expense is not always consistent when comparing periods due to the changing mix of income (loss) before income taxes within the countries in which the Company operates. Interim period income tax expense or benefit is computed at the estimated annual effective income tax rate, unless adjusted for specific discrete items as required.

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

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, Intangibles–Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. In this update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, the entity is then required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. However, if an entity concludes otherwise, then no further action is required. The adoption of this guidance on January 1, 2013 did not have any impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is effective for fiscal years beginning after December 15, 2012. The update adds new disclosure requirements including the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, entities would instead cross reference to the related note to the financial statements for additional information. The adoption of this guidance on January 1, 2013 resulted in the addition of certain financial disclosure information, but did not have a material impact on the Company’s consolidated financial statements.

2. Acquisition

On June 29, 2012, Furmanite America, Inc. (“Furmanite America”), a wholly owned subsidiary of the Company, entered into and consummated an Asset Purchase Agreement to acquire certain assets, including inventory, equipment and intangible assets, all of which relate to operations in the Americas (which includes operations in North America, South America and Latin America), of the Houston Service Center (“HSC”) of MCC Holdings, Inc., a wholly owned subsidiary of Crane Energy Flow Solutions, for total cash consideration of $9.3 million. HSC provides valve and actuator repair, maintenance and testing services to customers in the refining, petrochemical and power industries. In connection with the acquisition, the Company borrowed an additional $9.3 million from its existing revolving credit facility.

3. Earnings Per Share

Basic earnings per share (“EPS”) are calculated as net income divided by the weighted-average number of shares of common stock outstanding during the period, which includes restricted stock. Restricted shares of the Company’s common stock have full voting rights and participate equally with common stock in dividends declared, if any, and undistributed earnings. As participating securities, the shares of restricted stock are included in the calculation of basic EPS using the two-class method. Diluted earnings per share assumes issuance of the net incremental shares from stock options and restricted stock units when dilutive. The weighted-average common shares outstanding used to calculate diluted earnings per share reflect the dilutive effect of common stock equivalents including options to purchase shares of common stock and restricted stock units, using the treasury stock method.

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2013		2012		2013		2012
Net income	$	6,761	$	1,844	$	9,325	$	1,014

Basic weighted-average common shares outstanding		37,402		37,253		37,372		37,229
Dilutive effect of common stock equivalents		150		89		149		128

Diluted weighted-average common shares outstanding		37,552		37,342		37,521		37,357


Earnings per share:
Basic	$	0.18	$	0.05	$	0.25	$	0.03
Dilutive	$	0.18	$	0.05	$	0.25	$	0.03
Stock options and restricted stock units excluded from diluted weighted-average common shares outstanding because their inclusion would have an anti-dilutive effect:		1,126		1,583		1,010		930

4. Accrued Expenses and Other Current Liabilities

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


	June 30, 2013		December 31, 2012
Compensation and benefits¹	$	19,734	$	16,609
Estimated potential uninsured liability claims		1,934		1,934
Value added tax payable		1,524		1,284
Professional, audit and legal fees		1,289		1,508
Taxes other than income		1,232		1,346
Rent		552		568
Other employee related expenses		439		222
Customer deposits		133		795
Interest		47		24
Other²		1,802		1,438

	$	28,686	$	25,728

¹	Includes restructuring accruals of $0.4 million and $2.0 million as of June 30, 2013 and December 31, 2012, respectively.

²	Includes restructuring accruals of $32 thousand and $0.1 million as of June 30, 2013 and December 31, 2012, respectively.

5. Restructuring

The Company committed to certain cost reduction initiatives during the second quarters of 2010 and 2012, including planned workforce reductions and restructuring of certain functions. The Company has taken these specific actions in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues.

2010 Cost Reduction Initiative

The Company committed to a cost reduction initiative in 2010 (the “2010 Cost Reduction Initiative”), primarily related to the restructuring of certain functions within the Company’s EMEA operations (which include operations in Europe, the Middle East and Africa) in order to improve the operational and administrative efficiency of its EMEA operations. The Company had substantially completed the 2010 Cost Reduction Initiative at the end of 2012, with total costs incurred since its inception of approximately $4.0 million. As of June 30, 2013, future cash payments of approximately $0.3 million are expected in connection with this initiative, all of which are expected to be paid in 2013. There were no restructuring costs incurred for either the three or six months ended June 30, 2013, nor for the three months ended June 30, 2012 and insignificant restructuring costs incurred for the six months ended June 30, 2012 related to this initiative.

2012 Cost Reduction Initiative

In 2012, the Company committed to another cost reduction initiative (the “2012 Cost Reduction Initiative”) related to further restructuring of its European operations within EMEA. This restructuring initiative included additional workforce reductions throughout the Company’s operating, selling, general and administrative functions. The Company has taken these specific actions in order to further reduce administrative and overhead expenses and streamline its European operations’ structure for improved operational efficiencies in the wake of the continued challenging economic conditions in the region. The Company had substantially completed the 2012 Cost Reduction Initiative at the end of 2012, with total restructuring costs incurred since inception of approximately $3.4 million, which primarily related to one-time termination benefits. As of June 30, 2013, future cash payments of approximately $0.1 million are expected in connection with this initiative, all of which are expected to be paid in 2013.

There were no restructuring costs incurred for the three and six months ended June 30, 2013 related to this initiative. For each of the three and six months ended June 30, 2012, restructuring costs of $0.1 million and $0.6 million are included in operating costs and selling, general and administrative expenses, respectively.

Estimated and actual expenses including severance, lease cancellations, and other restructuring costs, in connection with these initiatives, have been recognized in accordance with FASB ASC 420-10, Exit or Disposal Cost Obligations, and FASB ASC 712-10, Nonretirement Postemployment Benefits.

Restructuring costs associated with the 2010 and 2012 Cost Reduction Initiatives were incurred in the Company’s EMEA segment and consist of the following (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2013		2012		2013		2012
Severance and benefit costs	$	—	$	643	$	—	$	644
Lease termination costs		—		61		—		61
Other restructuring costs		—		42		—		42

Total	$	—	$	746	$	—	$	747

The activity related to reserves associated with the remaining cost reduction initiatives for the six months ended June 30, 2013, is as follows (in thousands):


	Reserve at December 31, 2012		Charges		Cash payments			Foreign currency adjustments			Reserve at June 30, 2013
2010 Cost Reduction Initiative
Severance and benefit costs	$	436	$	—	$	(101	)	$	(7	)	$	328
Lease termination costs		24		—		—			—			24
Other restructuring costs		19		—		(18	)		—			1

2012 Cost Reduction Initiative
Severance and benefit costs		1,533		—		(1,420	)		(23	)		90
Lease termination costs		76		—		(75	)		(1	)		—
Other restructuring costs		33		—		(27	)		1			7

Total	$	2,121	$	—	$	(1,641	)	$	(30	)	$	450

Total workforce reductions related to the 2010 and 2012 Cost Reduction Initiatives included terminations of 138 employees, all of which are related to the Company’s EMEA segment.

6. Long-Term Debt

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


	June 30, 2013			December 31, 2012
Borrowings under the revolving credit facility (the “Credit Agreement”)	$	39,300		$	39,300
Capital leases		30			45
Notes payable		2,801			1,010
Other debt		274			1,444

Total long-term debt		42,405			41,799
Less: current portion of long-term debt		(1,360	)		(2,190	)

Total long-term debt, non-current	$	41,045		$	39,609

Credit Facilities

On March 5, 2012, certain foreign subsidiaries (the “foreign subsidiary designated borrowers”) of Furmanite Worldwide, Inc. (“FWI”), a wholly owned subsidiary of the Company, and FWI entered into a credit agreement with a banking syndicate led by JPMorgan Chase Bank, N.A., as Administrative Agent (the “Credit Agreement”). The Credit Agreement, which matures on February 28, 2017, provides a revolving credit facility of up to $75.0 million. A portion of the amount available under the Credit Agreement (not in excess of $20.0 million) is available for the issuance of letters of credit. In addition, a portion of the amount available under the Credit Agreement (not in excess of $7.5 million in the aggregate) is available for swing line loans to FWI. The loans outstanding to the foreign subsidiary designated borrowers under the Credit Agreement may not exceed $50.0 million in the aggregate.

At June 30, 2013, $39.3 million was outstanding under the Credit Agreement. Borrowings under the Credit Agreement bear interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate, at the option of the borrower, including a margin above such rates, and subject to an adjustment based on a calculated Funded Debt to Adjusted EBITDA ratio (the “Leverage Ratio” as defined in the Credit Agreement)), which was 2.0% at June 30, 2013. On April 30, 2013, the Company entered into a forward-dated interest rate swap to mitigate the risk of changes in the variable interest rate. The effect of the swap is to fix the interest rate at 0.75% plus the margin and Leverage Ratio adjustment, as described above, beginning April 29, 2014 through February 28, 2017 on the $39.3 million currently outstanding under the Credit Agreement. See Note 10 for further information regarding the interest rate swap. The Credit Agreement contains a commitment fee, which ranges from 0.25% to 0.30% based on the Leverage Ratio (0.25% at June 30, 2013), and is based on the unused portion of the amount available under the Credit Agreement. Adjusted EBITDA is net income (loss) plus interest, income taxes, depreciation and amortization, and other non-cash expenses minus income tax credits and non-cash items increasing net income (loss) as defined in the Credit Agreement. All obligations under the Credit Agreement are guaranteed by FWI and certain of its subsidiaries under a guaranty and collateral agreement, and are secured by a first priority lien on FWI and certain of its subsidiaries’ assets (which approximated $164.7 million as of June 30, 2013). The Parent Company has granted a security interest in its stock of FWI as collateral security for the lenders under the Credit Agreement, but is not a party to the Credit Agreement.

The Credit Agreement includes financial covenants, which require that the Company maintain: (i) a Leverage Ratio of no more than 2.75 to 1.00 as of the last day of each fiscal quarter, measured on a trailing four-quarters basis, (ii) a fixed charge coverage ratio of at least 1.25 to 1.00, defined as Adjusted EBITDA minus capital expenditures / interest plus cash taxes plus scheduled payments of debt plus Restricted Payments made (i.e. all dividends, distributions and other payments in respect of capital stock, sinking funds or similar deposits on account thereof or other returns of capital, redemption or repurchases of equity interests, and any payments to Parent or its subsidiaries (other than FWI and its subsidiaries)), and (iii) a minimum asset coverage of at least 1.50 to 1.00, defined as cash plus net accounts receivable plus net inventory plus net property, plant and equipment of FWI and its material subsidiaries that are subject to a first priority perfected lien in favor of the Administrative Agent and the Lenders / Funded Debt. FWI is also subject to certain other compliance provisions including, but not limited to, restrictions on indebtedness, guarantees, dividends and other contingent obligations and transactions. Events of default under the Credit Agreement include customary events, such as change of control, breach of covenants or breach of representations and warranties. At June 30, 2013, FWI was in compliance with all covenants under the Credit Agreement.

Considering the outstanding borrowings of $39.3 million, and $1.5 million related to outstanding letters of credit, the unused borrowing capacity under the Credit Agreement was $34.2 million at June 30, 2013.

Notes Payable and Other Debt

On February 23, 2011, in connection with the acquisition of Self Leveling Machines, Inc. and certain assets of Self Levelling Machines Pty. Ltd., the Company issued $5.1 million ($2.9 million denominated in U.S. dollars and $2.2 million denominated in Australian dollars) of notes payable (the “SLM Notes”), payable in installments through February 23, 2013. All obligations under the SLM Notes were secured by a first priority lien on the assets acquired in the acquisition. Upon full settlement of the SLM Notes in February 2013 and resultant release of the lien by the sellers’ equity holders, the acquired assets became assets secured under the Credit Agreement. At December 31, 2012, $1.0 million was outstanding under the SLM Notes. The SLM Notes bore interest at a fixed rate of 2.5% per annum.

On January 1, 2013, in connection with an asset purchase, the Company issued a $1.9 million promissory note, which bears interest at 5.0% per annum and will be paid in four equal annual installments of $0.5 million beginning January 1, 2014, with the final installment payment due on January 1, 2017.

On February 28, 2013, in connection with acquired assets, the Company issued a $0.9 million note payable due on March 1, 2014.

In 2012, the Company incurred $1.4 million of debt in connection with an asset purchase. The debt is payable in installments with approximately $1.2 million due in 2013 and approximately $0.1 million due in both 2014 and 2015, with $0.3 million and $1.4 million outstanding at June 30, 2013 and December 31, 2012, respectively.

7. Retirement Plans

Two of the Company’s foreign subsidiaries have defined benefit pension plans, one plan covering certain of its United Kingdom employees (the “U.K. Plan”) and the other covering certain of its Norwegian employees (the “Norwegian Plan”). As the Norwegian Plan represents less than three percent of both the Company’s total pension plan liabilities and total pension plan assets, only the schedule of net periodic pension cost includes combined amounts from the two plans, while assumption and narrative information relates solely to the U.K. Plan.

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Service cost	$	216		$	256		$	438		$	514
Interest cost		849			893			1,716			1,785
Expected return on plan assets		(868	)		(792	)		(1,754	)		(1,584	)
Amortization of prior service cost		(23	)		(24	)		(47	)		(48	)
Amortization of net actuarial loss		328			228			664			456

Net periodic pension cost	$	502		$	561		$	1,017		$	1,123

The expected long-term rate of return on invested assets is determined based on the weighted average of expected returns on asset investment categories as follows: 5.7% overall, 7.0% for equities and 3.7% for bonds. The Company expects to contribute $1.9 million to the pension plan for 2013, of which $0.5 million has been contributed through June 30, 2013.

8. Stock-Based Compensation

The Company has stock option plans and agreements for officers, directors and key employees which allow for the issuance of stock options, restricted stock, restricted stock units and stock appreciation rights. For the three and six months ended June 30, 2013, the total compensation cost charged against income and included in selling, general and administrative expenses for stock-based compensation arrangement was $0.4 million and $0.6 million, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2012, respectively. The expense for the three and six months ended June 30, 2012 included $0.1 million associated with the accelerated vesting of awards in connection with the retirement of one of the Company’s directors.

During the first quarter of 2013, the Company granted an aggregate of 30,000 shares of restricted stock awards to its outside directors and options to an employee to purchase 35,000 shares of its common stock with a grant date fair market value of $6.05 and $3.51 per share, respectively. Additionally, 46,403 restricted stock units with a grant date fair value of $0.3 million vested, resulting in the issuance of 36,391 shares of common stock, net of 10,012 shares which were withheld for tax obligations of the grantees, as allowed under the plan. During the second quarter of 2013, the Company granted to certain employees an aggregate of 459,032 restricted stock units and options to purchase an aggregate of 344,900 shares of its common stock with a grant date fair market value of $6.89 and $3.93 per share, respectively. The restricted stock units are subject to forfeiture unless certain performance objectives are achieved.

During the first quarter of 2012, the Company granted 154,721 restricted stock units to certain employees with a grant date fair market value of $6.99 per share and 40,000 shares of restricted stock awards to its directors at a grant date fair value of $6.99 per share. In the second quarter of 2012, the Company granted options to an employee to purchase 30,000 shares of its common stock with a grant date fair market value of $2.71 per share. In addition, during the second quarter of 2012, the Company granted to certain employees 402,469 restricted stock units and options to purchase 801,658 shares of its common stock with a grant date fair market value of $4.63 and $2.61 per share, respectively. The restricted stock units and stock options are subject to forfeiture unless certain performance objectives are achieved.

The Company uses authorized but unissued shares of common stock for stock option exercises and restricted stock issuances pursuant to the Company’s share-based compensation plan and treasury stock for issuances outside of the plan. As of June 30, 2013, the total unrecognized compensation expense related to stock options and restricted stock awards was $2.9 million and $4.9 million, respectively.

9. Accumulated Other Comprehensive Loss

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


	June 30, 2013			December 31, 2012
Net actuarial loss and prior service credit	$	(20,159	)	$	(22,188	)
Less: deferred tax benefit		4,847			5,335

Net of tax		(15,312	)		(16,853	)
Change in fair value of interest rate swap		503			—
Less: deferred tax liability		(201	)		—

Net of tax		302			—
Foreign currency translation adjustment		(1,304	)		2,239

Total accumulated other comprehensive loss	$	(16,314	)	$	(14,614	)

Changes in accumulated other comprehensive income (loss) by component in the consolidated statements of comprehensive income include the following for the three and six months ended June 30, (in thousands):


	Defined Benefit Pension Items			Interest Rate Swap		Foreign Currency Items			Accumulated Other Comprehensive Loss
Three months ended June 30, 2013:
Beginning balance, net	$	(15,541	)	$	—	$	(31	)	$	(15,572	)
Other comprehensive income (loss) before reclassifications¹		(3	)		302		(1,273	)		(974	)
Amounts reclassified from accumulated other comprehensive income²³		232			—		—			232

Net other comprehensive income (loss)		229			302		(1,273	)		(742	)

Ending balance, net	$	(15,312	)	$	302	$	(1,304	)	$	(16,314	)


Three months ended June 30, 2012:
Beginning balance, net	$	(12,766	)	$	—	$	1,657		$	(11,109	)
Other comprehensive income (loss) before reclassifications¹		268			—		(1,404	)		(1,136	)
Amounts reclassified from accumulated other comprehensive income²³		154			—		—			154

Net other comprehensive income (loss)		422			—		(1,404	)		(982	)

Ending balance, net	$	(12,344	)	$	—	$	253		$	(12,091	)


Six months ended June 30, 2013:
Beginning balance, net	$	(16,853	)	$	—	$	2,239		$	(14,614	)
Other comprehensive income (loss) before reclassifications¹		1,072			302		(3,543	)		(2,169	)
Amounts reclassified from accumulated other comprehensive income²³		469			—		—			469

Net other comprehensive income (loss)		1,541			302		(3,543	)		(1,700	)

Ending balance, net	$	(15,312	)	$	302	$	(1,304	)	$	(16,314	)


Six months ended June 30, 2012:
Beginning balance, net	$	(12,524	)	$	—	$	2		$	(12,522	)
Other comprehensive income before reclassifications¹		(128	)		—		251			123
Amounts reclassified from accumulated other comprehensive income²³		308			—		—			308

Net other comprehensive income		180			—		251			431

Ending balance, net	$	(12,344	)	$	—	$	253		$	(12,091	)

Net of tax expense of $0.1 million and $0.5 million for the three and six months ended June 30, 2013, respectively, and $0.1 million for each of the three and six months ended June 30, 2012 for the defined benefit pension plans. Net of tax expense of $0.2 million for the three and six months ended June 30, 2013 for the interest rate swap.

²	Net of tax expense of $0.1 million for defined benefit pension plans for each of the three and six months ended June 30, 2013 and 2012.

³	Reclassification adjustments out of accumulated comprehensive income for amortization of prior service cost are included in the computation of net periodic pension cost. See Note 7 for additional details.

10. Derivative Instruments and Hedging Activities

The Company manages economic risk, including interest rate, liquidity and credit risks primarily by managing the amount, sources, and duration of its debt funding and, to a limited extent, the use of derivative instruments. The Company does not enter into derivative instruments for speculative purposes.

During the three months ended June 30, 2013, the Company entered into a forward-dated interest rate swap to hedge interest rate risk on its $39.3 million Credit Agreement. The Company’s objective in using the interest rate derivative is to manage exposure to interest rate movements and add stability to interest expense. Upon inception, the interest rate swap has been designated as a cash flow hedge and involves the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement without exchange of the underlying notional amount.

The following table summarizes the terms of the interest rate swap outstanding at June 30, 2013 (in thousands).

Type

Effective Date

Maturity Date

Fixed Rate

Floating Rate

Notional Amount

Interest rate swap

April 29, 2014

February 28, 2017

0.75

1 Month LIBOR

39,300

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheets as of June 30, 2013 (in thousands).

Asset Derivative Instruments

Liability Derivative Instruments

June 30, 2013

Classification

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Interest rate swap

Current

Prepaid expenses and other current assets

—

Accrued expenses and other current liabilities

—

Interest rate swap

Non-current

Intangible and other assets, net

503

Other liabilities

—

Total

503

—

See Note 14 for additional information on the fair value of the Company’s interest rate swap. The Company had no outstanding derivative instruments at December 31, 2012.

The Company has concluded that the hedging relationship for the interest rate swap is highly effective. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in other comprehensive income and will be subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings and included in interest income and other income (expense) on the consolidated statements of income.

Amounts reported in other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that approximately $30 thousand will be reclassified from other comprehensive income as an increase to interest expense over the next twelve months.

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of comprehensive income (in thousands).


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2013		2012		2013		2012
Amount of income recognized in other comprehensive income (loss) for the interest rate swap, net of tax (effective portion)	$	302	$	—	$	302	$	—
Amount of loss reclassified from accumulated other comprehensive loss into interest expense for the interest rate swap, net of tax (effective portion)		—		—		—		—
Amount of loss reclassified from accumulated other comprehensive loss into interest income and other income (expense) for the interest rate swap, net of tax (ineffective portion)		—		—		—		—

Derivative financial agreements expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with major credit-worthy financial institutions.

11. Income Taxes

For the six months ended June 30, 2013 and 2012, the Company recorded income tax expense of $6.0 million and $2.2 million, respectively. For the three months ended June 30, 2013 and 2012, the Company recorded income tax expense of $4.4 million and $2.7 million, respectively. For the three and six months ended June 30, 2013 and 2012, the income tax expense reflects the Company’s estimated annual effective income tax rate considering the statutory rates in the countries in which the Company operates and the effects of valuation allowance changes for certain foreign entities.

Income tax expense as a percentage of income before income taxes was approximately 39.4% and 59.3% for the three months ended June 30, 2013 and 2012, respectively, and 39.0% and 68.8% for the six months ended June 30, 2013 and 2012, respectively. The difference in the income tax rates between periods is related to changes in the mix of income or loss before income taxes between countries whose income taxes are offset by full valuation allowance and those that are not, and differing statutory tax rates in the countries in which the Company incurs tax liabilities.

Unrecognized Tax Benefits

A reconciliation of the change in the unrecognized tax benefits for the three months ended June 30, 2013 is as follows (in thousands):


Balance at December 31, 2012	$	1,149
Additions based on tax positions		276
Reductions due to lapses of statutes of limitations		(218	)

Balance at June 30, 2013	$	1,207

Unrecognized tax benefits at June 30, 2013 and December 31, 2012 of $1.2 million and $1.1 million, respectively, for uncertain tax positions, primarily related to transfer pricing, are included in other liabilities on the consolidated balance sheets and would impact the effective tax rate for certain foreign jurisdictions if recognized.

The Company incurred no significant interest or penalties for the three or six months ended June 30, 2013 or 2012 related to underpayments of income taxes or uncertain tax positions.

12. Commitments and Contingencies

The operations of the Company are subject to federal, state and local laws and regulations in the U.S. and various foreign locations relating to protection of the environment. Although the Company believes its operations are in compliance with applicable environmental regulations, there can be no assurance that costs and liabilities will not be incurred by the Company. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from operations of the Company, could result in costs and liabilities to the Company. The Company has recorded, in other liabilities, an undiscounted reserve for environmental liabilities related to the remediation of site contamination for properties in the U.S. in the amount of $0.9 million as of June 30, 2013 and December 31, 2012. While there is a reasonable possibility due to the inherent nature of environmental liabilities that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts would be material to its financial statements.

Furmanite America, Inc., a subsidiary of the Company, is involved in disputes with a customer, INEOS USA LLC, which claims that the subsidiary failed to provide it with satisfactory services at the customer’s facilities. On April 17, 2009, the customer initiated legal action against the subsidiary in the Common Pleas Court of Allen County, Ohio, alleging that the subsidiary and one of its former employees, who performed data services at one of the customer’s facilities, breached its contract with the customer and failed to provide the customer with adequate and timely information to support the subsidiary’s work at the customer’s facility from 1998 through the second quarter of 2005. The customer’s complaint seeks damages in an amount that the subsidiary believes represents the total proposed civil penalty, plus the cost of unspecified supplemental environmental projects requested by the regulatory agency to reduce air emissions at the customer’s facility, and also seeks unspecified punitive damages. The subsidiary believes that it provided the customer with adequate and timely information to support the subsidiary’s work at the customer’s facilities and will vigorously defend against the customer’s claim.

The Company has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business.

While the Company cannot make an assessment of the eventual outcome of all of these matters or determine the extent, if any, of any potential uninsured liability or damage, reserves of $1.9 million for all matters are recorded in accrued expenses and other current liabilities as of both June 30, 2013 and December 31, 2012. While there is a reasonable possibility that a loss exceeding amounts already recognized could occur, the Company does not believe such amounts would be material to its financial statements.

Management believes, after consulting with counsel, that the ultimate resolution of such contingencies will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.

13. Business Segment Data and Geographical Information

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

An operating segment is defined as a component of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. For financial reporting purposes, the Company operates in three segments which comprise the Company’s three geographical areas: the Americas, EMEA and Asia-Pacific.

The Company evaluates performance based on the operating income (loss) from each segment which excludes interest income and other income (expense), interest expense, and income tax expense (benefit). The accounting policies of the reportable segments are the same as those described in Note 1. Intersegment revenues are recorded at cost plus a profit margin. All transactions and balances between segments are eliminated in consolidation.

The following is a summary of the financial information of the Company’s reportable segments as of and for the three and six months ended June 30, 2013 and 2012 reconciled to the amounts reported in the consolidated financial statements (in thousands):


	Americas			EMEA			Asia-Pacific			Reconciling Items			Total
Three months ended June 30, 2013:
Revenues from external customers¹	$	74,347		$	24,694		$	9,335		$	—		$	108,376
Intersegment revenues²		2,432			2,800			277			(5,509	)		—

Operating income (loss)³ ⁴	$	13,122		$	3,001		$	1,274		$	(5,773	)	$	11,624
Allocation of headquarter costs⁵		(3,950	)		(1,328	)		(495	)		5,773			—

Adjusted operating income	$	9,172		$	1,673		$	779		$	—		$	11,624


Three months ended June 30, 2012:
Revenues from external customers¹	$	46,944		$	27,485		$	11,499		$	—		$	85,928
Intersegment revenues²		935			2,019			400			(3,354	)		—

Operating income (loss)³ ⁴	$	6,244		$	1,466		$	2,587		$	(5,494	)	$	4,803
Allocation of headquarter costs⁵		(2,984	)		(1,777	)		(733	)		5,494			—

Adjusted operating income (loss)	$	3,260		$	(311	)	$	1,854		$	—		$	4,803


Six months ended June 30, 2013:
Revenues from external customers¹	$	135,107		$	44,999		$	17,308		$	—		$	197,414
Intersegment revenues²		4,713			5,128			328			(10,169	)		—

Operating income (loss)³ ⁴	$	20,326		$	3,803		$	1,909		$	(10,336	)	$	15,702
Allocation of headquarter costs⁵		(7,058	)		(2,374	)		(904	)		10,336			—

Adjusted operating income	$	13,268		$	1,429		$	1,005		$	—		$	15,702


Six months ended June 30, 2012:
Revenues from external customers¹	$	87,642		$	50,512		$	19,556		$	—		$	157,710
Intersegment revenues²		1,138			3,629			618			(5,385	)		—

Operating income (loss)³ ⁴	$	10,599		$	270		$	2,813		$	(9,630	)	$	4,052
Allocation of headquarter costs⁵		(5,338	)		(3,094	)		(1,198	)		9,630			—

Adjusted operating income (loss)	$	5,261		$	(2,824	)	$	1,615		$	—		$	4,052

¹	Included in the Americas are United States revenues of $72.2 million and $131.6 million for the three and six months ended June 30, 2013, respectively, and $46.5 million and $86.7 million for the three and six months ended June 30, 2012, respectively.

²	Reconciling Items represent eliminations or reversals of transactions between reportable segments.

³	Reconciling Items represent certain corporate overhead costs, including executive management, strategic planning, treasury, legal, human resources, information technology, and accounting risk management, which are not allocated to reportable segments.

⁴

Includes corporate headquarter relocation charges of $0.7 million and $1.5 million for the three and six months ended June 30, 2012, respectively, in reconciling items, and restructuring charges of $0.7 million in EMEA for each of the three and six months ended June 30, 2012. No relocation charges or restructuring charges were incurred in the three or six months ended June 30, 2013.

⁵	Represents the allocation of headquarter costs and operating income (loss) had the Company allocated such costs based on the segments’ respective revenues. Historically, the Company has not allocated headquarter costs to its operating segments.

Goodwill in the Americas at both June 30, 2013 and December 31, 2012 totaled $7.0 million. Goodwill in EMEA and Asia-Pacific totaled $6.6 million and $1.9 million, respectively, at each of June 30, 2013 and December 31, 2012.

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


	June 30, 2013		December 31, 2012
Americas	$	42,110	$	34,532
EMEA		10,233		11,417
Asia-Pacific		3,699		4,672

Total long-lived assets	$	56,042	$	50,621

14. Fair Value of Financial Instruments and Credit Risk

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

•

Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

•

Level 2 — Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.

•

Level 3 — Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The following table presents the Company’s fair value hierarchy for its financial instruments that required disclosure of their fair values on a recurring basis as of June 30, 2013 (in thousands).


	Fair Value		Level 1		Level 2		Level 3
Interest rate swap asset as of June 30, 2013	$	503	$	—	$	503	$	—

The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their carrying amounts due to the relatively short period to maturity of these instruments. The interest rate swap asset is recorded at fair value on a recurring basis based on models using inputs, such as interest rate yield curves, LIBOR swap curves and OIS curves, observable for substantially the full term of the contract. See Note 10 for additional information on the Company’s interest rate swap. The estimated fair value of all debt as of June 30, 2013 and December 31, 2012 approximated the carrying value. These fair values were estimated based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements, when quoted market prices were not available. The estimated fair value of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.

There were no transfers between Levels of the fair value hierarchy during the three or six months ended June 30, 2013 or 2012.

The Company provides services to a domestic and international client base that includes petroleum refineries, chemical plants, offshore energy production platforms, steel mills, nuclear power stations, conventional power stations, pulp and paper mills, food and beverage processing plants, other flow process facilities. The Company does not believe that it has a significant concentration of credit risk at June 30, 2013, as the Company’s accounts receivable are generated from these business industries with customers located throughout the Americas, EMEA and Asia-Pacific.

15. Subsequent Event

On July 15, 2013, Furmanite America entered into an Asset Purchase Agreement (“APA”) to acquire certain assets, including working capital, equipment and intangible assets, all of which relate to operations in the Americas, of the Engineering and Construction segment (“ENG E&C”) of ENGlobal Corporation (the “Seller”). The current employees within these operations, totaling approximately 900 full-time professionals, will transition to Furmanite America in connection with this transaction. The transaction is expected to be completed within 60 days from the date of the execution of the APA. Upon closing, Furmanite America will make a cash payment estimated at approximately $18.0 million for the acquired net working capital, net of reserves. The working capital payment is subject to adjustment for working capital changes through the effective date, as defined in the APA. In addition, Furmanite America will enter into a four year 4% interest per annum promissory note with the Seller in the principal amount of $3.5 million. In connection with the acquisition, the Company expects to borrow an additional $18.0 million under its Credit Agreement.

FURMANITE CORPORATION AND SUBSIDIARIES

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Business Overview

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

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

Financial Overview

For the three and six months ended June 30, 2013, consolidated revenues increased by $22.5 million and $39.7 million, respectively, and operating income increased by $6.8 million and $11.7 million, respectively, compared to the three and six months ended June 30, 2012. These increases related primarily to volume increases in on-line and off-line services in the Americas associated with leak sealing, hot tapping, line isolation, heat treatment, on-site machining, valve repair, and non-destructive testing and inspection services. The operating results in 2013 were positively impacted by improved utilization of labor and increased leverage on fixed costs from higher revenue levels in the current year period as the Company’s strategic global organization structure takes hold, resulting in successes in obtaining work it had not historically participated in, including securing multiple service line projects and cross selling of services. In addition, operating results in the prior year period were unfavorably affected by several factors, including the impact from its cost reduction initiatives and the relocation of its corporate headquarters.

Net income for the three and six months ended June 30, 2013 of $6.8 million and $9.3 million, respectively, represented an increase of $4.9 million and $8.3 million, respectively, compared to the three and six months ended June 30, 2012. The Company’s diluted earnings per share for the three and six months ended June 30, 2013 were $0.18 and $0.25, respectively, compared to $0.05 and $0.03 for the three and six months ended June 30, 2012, respectively.

Results of Operations


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Revenues	$	108,376		$	85,928		$	197,414		$	157,710
Costs and expenses:
Operating costs (exclusive of depreciation and amortization)		71,697			58,326			134,428			110,678
Depreciation and amortization expense		2,679			1,964			5,508			3,989
Selling, general and administrative expense		22,376			20,835			41,776			38,991

Total costs and expenses		96,752			81,125			181,712			153,658

Operating income		11,624			4,803			15,702			4,052
Interest income and other income (expense), net		(181	)		(72	)		148			(200	)
Interest expense		(278	)		(197	)		(556	)		(598	)

Income before income taxes		11,165			4,534			15,294			3,254
Income tax expense		(4,404	)		(2,690	)		(5,969	)		(2,240	)

Net income	$	6,761		$	1,844		$	9,325		$	1,014


Earnings per common share:
Basic	$	0.18		$	0.05		$	0.25		$	0.03
Diluted	$	0.18		$	0.05		$	0.25		$	0.03

Additional Revenue Information:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
On-line services	$	38,212		$	29,949		$	69,565		$	60,094
Off-line services		58,351			42,652			103,927			71,370
Other services		11,813			13,327			23,922			26,246

Total revenues	$	108,376		$	85,928		$	197,414		$	157,710

Business Segment and Geographical Information


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Revenues:
Americas	$	74,347		$	46,944		$	135,107		$	87,642
EMEA		24,694			27,485			44,999			50,512
Asia-Pacific		9,335			11,499			17,308			19,556

Total revenues		108,376			85,928			197,414			157,710

Costs and expenses:
Operating costs (exclusive of depreciation and amortization)
Americas		48,939			32,136			91,701			60,776
EMEA		16,650			19,466			31,163			37,666
Asia-Pacific		6,108			6,724			11,564			12,236

Total operating costs (exclusive of depreciation and amortization)		71,697			58,326			134,428			110,678
Operating costs as a percentage of revenue		66.2	%		67.9	%		68.1	%		70.2	%

Depreciation and amortization expense
Americas, including corporate		1,904			1,119			3,850			2,258
EMEA		444			440			979			893
Asia-Pacific		331			405			679			838

Total depreciation and amortization expense		2,679			1,964			5,508			3,989
Depreciation and amortization expense as a percentage of revenue		2.5	%		2.3	%		2.8	%		2.5	%

Selling, general and administrative expense
Americas, including corporate¹		16,157			12,937			29,565			23,647
EMEA		4,598			6,118			9,056			11,678
Asia-Pacific		1,621			1,780			3,155			3,666

Total selling general and administrative expense		22,376			20,835			41,776			38,991
Selling, general and administrative expense as a percentage of revenue		20.6	%		24.2	%		21.2	%		24.7	%


Total costs and expenses	$	96,752		$	81,125		$	181,712		$	153,658

¹	Includes corporate overhead costs of $5.8 million and $5.5 million for the three months ended June 30, 2013 and 2012, respectively, and $10.3 million and $9.6 million for the six months ended June 30, 2013 and 2012, respectively.

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

Revenues

For the six months ended June 30, 2013, consolidated revenues increased by $39.7 million, or 25.2%, to $197.4 million, compared to $157.7 million for the six months ended June 30, 2012. Changes related to foreign currency exchange rates unfavorably impacted revenues by $0.7 million, of which $0.5 million and $0.2 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $40.4 million, or 25.6%, for the six months ended June 30, 2013 compared to the same period in 2012. This $40.4 million increase in revenues consisted of a $47.4 million increase in the Americas but was partially offset by decreases of $5.0 million and $2.0 million in EMEA and Asia-Pacific, respectively. The increase in revenues in the Americas, resulting from a combination of acquisition-related growth and early successes attributable to organizational structure improvements, was primarily related to increases in off-line and on-line services, which increased approximately 88% and 31%, respectively, when compared to revenues in the same period in 2012. Over half of the increase in off-line services was related to volume increases in heat treatment, on-site machining and valve repair services with the remainder of the increase primarily attributable to non-destructive testing and inspection services. Increases in on-line services primarily related to volume increases in leak sealing, hot tapping and line isolation services. The decrease in revenues in EMEA,

which was almost wholly attributable to its central European locations, was related to volume decreases in valve repair, leak sealing and other products and manufacturing services. These decreases were partially offset by moderate volume increases in bolting services within off-line services as well as line stopping and composite repair services within on-line services. The decrease in revenues in Asia-Pacific, which all related to the three month period ended June 30, 2013, were primarily attributable to decreases in both on-line and off-line services, and primarily consisted of volume decreases in leak sealing and composite repair services within on-line services and bolting services within off-line services as a large project was completed in the second quarter of 2012 with no such projects completed in the current year second quarter. These decreases were partially offset by increases in hot tapping services within on-line services and on-site machining services within off-line services.

For the three months ended June 30, 2013, consolidated revenues increased by $22.5 million, or 26.1%, to $108.4 million, compared to $85.9 million for the three months ended June 30, 2012. Changes related to foreign currency exchange rates unfavorably impacted revenues by $0.4 million, of which $0.3 million and $0.1 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $22.9 million, or 26.6%, for the three months ended June 30, 2013 compared to the same period in 2012. This $22.9 million increase in revenues consisted of an increase of $27.4 million in the Americas, which was partially offset by decreases of $2.5 million and $2.0 million in EMEA and Asia-Pacific, respectively. Revenue increases in the Americas were primarily related to increases in off-line and on-line services, which increased approximately 81% and 47%, respectively, when compared to revenues in the same period in 2012. Approximately 60% of the increase in off-line services was the result of volume increases in heat treatment, on-site machining and valve repair services with the balance of the increase associated with non-destructive testing and inspection services, while a majority of the increase in on-line services related to volume increases in leak sealing, line isolation and hot tapping services. The decrease in revenues in EMEA primarily related to decreases in off-line services, the majority of which consisted of volume decreases in valve repair and on-site machining services. Revenue decreases in Asia-Pacific were primarily attributable to the factors identified in the previous paragraph.

Operating Costs (exclusive of depreciation and amortization)

For the six months ended June 30, 2013, operating costs increased $23.7 million, or 21.4%, to $134.4 million, compared to $110.7 million for the six months ended June 30, 2012. Changes related to foreign currency exchange rates favorably impacted costs by $0.5 million, of which $0.3 million and $0.2 million were related to favorable impacts from EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, operating costs increased $24.2 million, or 21.9%, for the six months ended June 30, 2013, compared to the same period in 2012. This change consisted of a $30.9 million increase in the Americas, partially offset by a decrease of $6.2 million and $0.5 million in EMEA and Asia-Pacific, respectively. The increase in operating costs in the Americas was primarily related to higher labor and material costs of approximately 41% as well as higher travel and leasing costs of approximately 9% when compared to the same period in 2012, which were attributable to the increase in revenues. The decrease in operating costs in EMEA was associated with reductions in labor and material costs of approximately 14% when compared to the same period in 2012 as a result of a decrease in activity levels and the effect of the prior year cost reduction initiative. The operating costs in Asia-Pacific decreased due to decreases in labor and material costs of approximately 4% when compared to the same period in 2012 as a result of decreased activity levels.

For the three months ended June 30, 2013, operating costs increased $13.4 million, or 22.9%, to $71.7 million, compared to $58.3 million for the three months ended June 30, 2012. Changes related to foreign currency exchange rates favorably impacted costs by $0.2 million, and related primarily to favorable impacts in EMEA. Excluding the foreign currency exchange rate impact, operating costs increased by $13.6 million, or 23.3%, for the three months ended June 30, 2013, compared to the same period in 2012. This change consisted of an increase of $16.8 million in the Americas, which was partially offset by decreases of $2.6 million and $0.6 million in EMEA and Asia-Pacific, respectively. The increase in operating costs in the Americas was primarily attributable to an increase in labor and material costs of approximately 43% and higher travel and leasing costs of approximately 9%, associated with the increase in revenues, when compared to the same period in 2012. The operating costs in EMEA decreased due to decreases in labor and material costs of approximately 11% when compared to the same period in 2012. The decrease in operating costs in Asia-Pacific was primarily due to decreases in labor costs of approximately 8% associated with the decreases in revenues when compared to the same period in 2012.

Operating costs as a percentage of revenue decreased to 68.1% from 70.2% for the six months ended June 30, 2013 and 2012, respectively, and decreased to 66.2% from 67.9% for the three months ended June 30, 2013 and 2012, respectively. The percentage of operating costs to revenues for the three and six months ended June 30, 2013 was lower compared to the same period in 2012 primarily due to the increase in revenues, which resulted in improved utilization of labor and better absorption of

fixed costs in the Americas, as well as a favorable mix of services, including several higher margin projects, and better utilization of labor in EMEA as a result of the prior year cost reduction initiative.

Depreciation and Amortization

For the three and six months ended June 30, 2013, depreciation and amortization expense increased $0.7 million and $1.5 million, respectively, when compared to the same periods in 2012, as a result of an increase in the average balance of depreciable property and equipment associated with $16.5 million of acquisition-related long-term and intangible assets combined with capital expenditures of approximately $12.8 million placed in service over the twelve-month period ended June 30, 2013. Changes related to foreign currency exchange rates had an insignificant impact on depreciation and amortization expense for each of the three and six months ended June 30, 2013. Depreciation and amortization expense related to acquisition-related assets in the twelve-month period ended June 30, 2013 was $0.9 million and $1.9 million for the three and six months ended June 30, 2013, respectively.

Selling, General and Administrative

For the six months ended June 30, 2013, selling, general and administrative expenses increased $2.8 million, or 7.1%, to $41.8 million compared to $39.0 million for the six months ended June 30, 2012. Changes related to foreign currency exchange rates were insignificant for the six months ended June 30, 2013. This increase in selling, general and administrative costs consisted of a $5.9 million increase in the Americas, partially offset by decreases of $2.6 million and $0.5 million in EMEA and Asia-Pacific, respectively. Selling, general and administrative expense increases in the Americas were related to an increase in personnel and related costs of approximately 25% when compared to the same period in 2012, associated primarily with increased activity levels, as well as the impact from the implementation of the Company’s strategic global organizational structure. Partially offsetting the effects of these increases was $1.5 million of costs included in the six months ended June 30, 2012 in connection with the prior year’s relocation of the Company’s corporate headquarters to Houston, Texas, for which no similar costs were incurred in the same period in 2013. In EMEA, decreases in selling, general and administrative costs were primarily related to reductions in salary and related costs of approximately 9% when compared to the same period in 2012, and were associated with the cost reduction initiative in 2012. In addition, the six months ended June 30, 2012 included $0.6 million of severance related restructuring costs, for which no similar costs were incurred in the same period in 2013. In Asia-Pacific, decreases in selling, general and administrative costs were primarily a result of the decreased activity levels within the region.

For the three months ended June 30, 2013, selling, general and administrative expenses increased $1.6 million, or 7.7%, to $22.4 million compared to $20.8 million for the three months ended June 30, 2012. Changes related to foreign currency exchange rates were insignificant for the three months ended June 30, 2013. This $1.6 million increase in selling, general and administrative expenses consisted of a $3.2 million increase in the Americas, partially offset by $1.4 million and $0.2 million decreases in EMEA and Asia-Pacific, respectively. The increase in selling, general and administrative expenses in the Americas was related to an increase in personnel and related costs of approximately 26% when compared to the same period in 2012, associated primarily with increased activity levels, as well as the impact from the implementation of the Company’s strategic global organizational structure. Partially offsetting the effects of these increases was $0.7 million of costs included in the three months ended June 30, 2012 in connection with the prior year’s relocation of the Company’s corporate headquarters to Houston, Texas, for which no similar costs were incurred in the same period in 2013. Decreases in selling, general and administrative expenses in EMEA were primarily related to reductions in salary and related costs of approximately 8% when compared to the same period in 2012, and were associated with the cost reduction initiative in 2012. In addition, the three months ended June 30, 2012 included severance related restructuring costs which totaled $0.6 million, and for which no similar costs were incurred in the same period in 2013. In Asia-Pacific, decreases in selling, general and administrative expenses were primarily related to the decreased activity levels within the region.

Selling, general and administrative costs as a percentage of revenues decreased to 20.6% and 21.2% for the three and six months ended June 30, 2013, respectively, compared to 24.2% and 24.7% for the three and six months ended June 30, 2012, respectively, principally as a result of the increased leverage on higher revenue levels and the effects of the prior year cost reduction initiative.

Other Income

Interest Income and Other Income (Expense), Net

For the three and six months ended June 30, 2013, interest income and other income (expense) increased $0.1 million and decreased $0.3 million, respectively, when compared to the same periods in 2012. Changes within interest income and other income (expense) primarily relate to fluctuations within foreign currency exchange gains and losses.

Interest Expense

For the six months ended June 30, 2013, consolidated interest expense remained consistent with the same period in 2012 as a slightly higher average interest rate on notes payable in 2013 was offset by the acceleration of $0.2 million of debt issuance costs in 2012 due to the termination of a previous credit agreement. For the three months ended June 30, 2013, consolidated interest expense increased $0.1 million when compared to the same period in 2012 due to a slightly higher interest rate on notes payable in the current year period.

Income Taxes

Income tax expense as a percentage of income before income taxes was approximately 39.4% and 39.0% for the three and six months ended June 30, 2013, respectively, compared to 59.3% and 68.8% for the three and six months ended June 30, 2012, respectively. The difference in the income tax rates between periods is related to changes in the mix of income or loss before income taxes between countries whose income taxes are offset by full valuation allowances and those that are not, and differing statutory rates in the countries in which the Company incurs tax liabilities. The lower estimated annual effective tax rate in the current year period is attributable to higher levels of pre-tax income combined with reduced losses in the central European countries with valuation allowances on their deferred tax assets.

Liquidity and Capital Resources

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

Net cash provided by operating activities for the six months ended June 30, 2013 increased to $2.5 million compared to $0.4 million in the six months ended June 30, 2012. The increase in net cash provided by operating activities resulted from an increase in net income and non-cash items in the current year period, which were partially offset by changes in working capital requirements. Changes in working capital, primarily associated with increased activity levels and acquisitions, decreased cash flow by approximately $17.2 million for the six months ended June 30, 2013 compared with a decrease of $7.8 million for the same period in 2012.

Net cash used in investing activities decreased to $7.7 million for the six months ended June 30, 2013 from $12.5 million for the six months ended June 30, 2012 primarily due to a decrease in cash paid for acquisitions, offset by an increase in capital expenditures during the six months ended June 30, 2013. In 2013, the Company paid $0.9 million in connection with acquisitions, as compared to $9.3 million of cash paid in connection with the acquisition of the Houston Service Center of MCC Holdings, Inc. (“HSC”) in 2012. Capital expenditures increased to $6.8 million for the six months ended June 30, 2013 from $3.3 million for the six months ended June 30, 2012. The increase in capital expenditures in the 2013 period compared to the 2012 period is consistent with the Company’s expectations for increased capital investment in the current year.

Consolidated capital expenditures for the calendar year 2013 have been budgeted at $16.0 million. Such expenditures, however, will depend on many factors beyond the Company’s control, including, without limitation, demand for services as well as domestic and foreign government regulations. No assurance can be given that required capital expenditures will not exceed anticipated amounts during 2013 or thereafter. Capital expenditures during the year are expected to be funded from existing cash and anticipated cash flows from operations.

Net cash used in financing activities was $2.1 million for the six months ended June 30, 2013 compared to net cash provided by financing activities of $6.4 million for the six months ended June 30, 2012. The Company’s financing activities in the six months ended June 30, 2013 consisted of payments on debt, offset by cash received from the issuance of common stock. During the six months ended June 30, 2012, the Company entered into a new credit facility and received borrowings of $30.0 million from the new credit facility in order to pay its remaining outstanding principal balance of $30.0 million upon the termination of the previous credit facility and paid $0.6 million of costs in connection with the refinancing of its credit facility. In addition, during the six months ended June 30, 2012, the Company borrowed an additional $9.3 million on its new credit facility to fund the HSC acquisition and made $2.7 million of principal payments on acquisition-related notes payable.

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

At June 30, 2013, $39.3 million was outstanding under the Credit Agreement. Borrowings under the Credit Agreement bear interest at variable rates (based on the prime rate, federal funds rate or Eurocurrency rate, at the option of the borrower, including a margin above such rates, and subject to an adjustment based on a calculated Funded Debt to Adjusted EBITDA ratio (the “Leverage Ratio” as defined in the Credit Agreement)), which was 2.0% at June 30, 2013. On April 30, 2013, the Company entered into a forward-dated interest rate swap to mitigate the risk of changes in the variable interest rate. The effect of the swap is to fix the interest rate at 0.75% plus the margin and Leverage Ratio adjustment, as described above, beginning April 29, 2014 through February 28, 2017 on the $39.3 million currently outstanding under the Credit Agreement. See Note 10 to the Company’s consolidated financial statements for further information regarding the interest rate swap. The Credit Agreement contains a commitment fee, which ranges from 0.25% to 0.30% based on the Leverage Ratio (0.25% at June 30, 2013), and is based on the unused portion of the amount available under the Credit Agreement. Adjusted EBITDA is net income (loss) plus interest, income taxes, depreciation and amortization, and other non-cash expenses minus income tax credits and non-cash items increasing net income (loss) as defined in the Credit Agreement. All obligations under the Credit Agreement are guaranteed by FWI and certain of its subsidiaries under a guaranty and collateral agreement, and are secured by a first priority lien on FWI and certain of its subsidiaries’ assets (which approximated $164.7 million as of June 30, 2013). The Parent Company has granted a security interest in its stock of FWI as collateral security for the lenders under the Credit Agreement, but is not a party to the Credit Agreement.

The Company committed to cost reduction initiatives during the second quarters of 2010 and 2012, in order to more strategically align the Company’s operating, selling, general and administrative costs relative to revenues. As of June 30, 2013, the costs incurred since the inception of these two cost reduction initiatives totaled approximately $7.4 million. During the three and six months ended June 30, 2013, the Company incurred no additional restructuring charges but made cash payments of $1.6 million related to the initiatives. As of June 30, 2013, the remaining reserve associated with these initiatives totaled $0.4 million, all of which are expected to require cash payments and are expected to be paid in 2013. Total workforce reductions for the 2010 and 2012 cost reduction initiatives included terminations of 138 employees in the Company’s EMEA segment.

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

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant policies are presented in the Notes to the Consolidated Financial Statements and under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Critical accounting policies are those that are most important to the portrayal of the Company’s financial position and results of operations. These policies require management’s most difficult, subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting policies and estimates, for which no significant changes have occurred in the six months ended June 30, 2013, include revenue recognition, allowance for doubtful accounts, goodwill, intangible and long-lived assets, stock-based compensation, income taxes, defined benefit pension plans, contingencies, and exit or disposal obligations. Critical accounting policies are discussed regularly, at least quarterly, with the Audit Committee of the Company’s Board of Directors.

Revenue Recognition

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

Allowance for Doubtful Accounts

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

Long-Lived Assets

Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with the provisions of FASB ASC 350, Intangibles — Goodwill and Other. Under FASB ASC 350, intangible assets with lives restricted by contractual, legal or other means are amortized over their useful lives. Finite-lived intangible assets are reviewed for impairment in accordance with the provisions of FASB ASC 360, Property, Plant, and Equipment.

Goodwill and other intangible assets not subject to amortization are tested for impairment annually (in the fourth quarter of each calendar year), or more frequently if events or changes in circumstances indicate that the assets might be impaired. Examples of such events or circumstances include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, or a loss of key personnel.

FASB ASC 350 requires a two-step process for testing goodwill impairment, however it permits an entity the option to first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If it is determined that, based on a qualitative assessment, it is not more likely than not that the Company’s fair value is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. Under the first step of the two-step process, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. A reporting unit is an operating segment or one level below an operating segment (referred to as a component). Two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. The Company has three reporting units for the purpose of testing goodwill impairment as the business segments are determined to be the reporting units. Second, if an impairment is indicated, the implied fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of the carrying value over the implied fair value.

The Company uses a multiple of revenues as the basis for its measurement of fair value as management considers this approach the most meaningful measure for each reporting unit, given the nature of the Company’s business of technical services, and considering all reporting units provide the same services with long term expectations of similar earnings percentages. To support the reasonableness of the calculated fair value, the Company compares the sum of the calculated fair values for each of the reporting units to the market capitalization of the Company as a whole, as the quoted market price provides the best evidence of fair value on a Company-wide basis. As of December 31, 2012, the Company’s fair value substantially exceeded its carrying value in each of its three reporting units, therefore no impairment was indicated. Additionally, no changes in circumstances have occurred in the six months ended June 30, 2013 which would warrant an additional impairment test in the current period. At each of June 30, 2013 and December 31, 2012, goodwill totaled $15.5 million. Goodwill totaled $7.0 million, $6.6 million and $1.9 million at each of June 30, 2013 and December 31, 2012 in the Americas, EMEA, and Asia-Pacific, respectively.

Property, Plant and Equipment

The Company accounts for property, plant and equipment in accordance with the provisions of FASB ASC 360, Property, Plant, and Equipment. Under FASB ASC 360, the Company reviews property, plant and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Factors that may affect recoverability include changes in planned use of equipment, closing of facilities and discontinuance of service lines. Property and equipment to be held and used is reviewed at least annually for possible impairment. The Company’s impairment review is based on an estimate of the undiscounted cash flow at the lowest level for which identifiable cash flows exist. Impairment occurs when the carrying value of the assets exceeds the estimated future undiscounted cash flows generated by the asset and the impairment is viewed as other than temporary. When impairment is indicated, an impairment charge is recorded for the difference between the carrying value of the asset and its fair market value. Depending on the asset, fair market value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition. No impairment of property, plant and equipment occurred in the three or six months ended June 30, 2013 or 2012.

Stock-Based Compensation

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

Income Taxes

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

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

Defined Benefit Pension Plans

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

Contingencies

Environmental

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

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

Other

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

Exit or Disposal Obligations

In the second quarters of 2010 and 2012, the Company committed to cost reduction initiatives, including planned workforce reductions and restructuring of certain functions. The Company has taken these specific actions in order to more strategically align its operating, selling, general and administrative costs relative to revenues. The Company has recorded expenses related to these cost reduction initiatives for severance, lease cancellations, and other restructuring costs in accordance with FASB ASC 420-10, Exit or Disposal Cost Obligations and FASB ASC 712-10, Nonretirement Postemployment Benefits.

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

New Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. In this update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, the entity is then required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. However, if an entity concludes otherwise, then no further action is required. The adoption of this guidance on January 1, 2013 did not have any impact on the Company’s consolidated financial statements.

Off-Balance Sheet Transactions

The Company was not a party to any off-balance sheet transactions at June 30, 2013 or December 31, 2012, or for the three or six months ended June 30, 2013 or 2012.

Inflation and Changing Prices

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

The Company centrally manages its debt, considering investment opportunities and risks, tax consequences and overall financing strategies. Based on the amount of variable rate debt, $39.3 million at June 30, 2013, an increase in interest rates by one hundred basis points would increase annual interest expense by approximately $0.4 million. On April 30, 2013, the Company entered into a forward-dated interest rate swap to mitigate the risk of change in the variable interest rate beginning April 29, 2014 through February 28, 2017. For more information on this swap, see Note 10 to the Company’s consolidated financial statements.

A significant portion of the Company’s business is exposed to fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of the foreign operations of the Company in Australia, Bahrain, Belgium, Canada, China, Denmark, France, Germany, Malaysia, The Netherlands, New Zealand, Nigeria, Norway, Singapore, Sweden and the United Kingdom. Foreign currency exchange rate changes, primarily the Australian Dollar and the British Pound, relative to the U.S. dollar resulted in an unfavorable impact on the Company’s U.S. dollar reported revenues for the three and six months ended June 30, 2013 when compared to the three and six months ended June 30, 2012. The revenue impact was somewhat mitigated with similar exchange effects on operating costs thereby reducing the exchange rate effect on operating income. The Company does not use interest rate or foreign currency rate hedges.

Based on the six months ended June 30, 2013, foreign currency-based revenues and operating income of $65.8 million and $5.6 million, respectively, a ten percent depreciation in all applicable foreign currencies would result in a decrease in revenues of $6.0 million and a reduction in operating income of $0.5 million.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated, as required by Rules 13a-15(e) and 15(a)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2013. Based on that evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013 to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

FURMANITE CORPORATION AND SUBSIDIARIES

PART II — Other Information

Item 1.

Legal Proceedings

The Company has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business.

Item 1A.

Risk Factors

During the quarter ended June 30, 2013, there were no material changes to the risk factors reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Item 6.

Exhibits


2.1*		Asset Purchase Agreement Between ENGlobal U.S., Inc. and Furmanite America, Inc. dated as of July 15, 2013.***

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

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

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

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

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

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

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

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

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

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

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

31.1*		Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 2, 2013.

31.2*		Certification of Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 2, 2013.

32.1*		Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 2, 2013.

32.2*		Certification of Principal Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 2, 2013.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.DEF**		XBRL Taxonomy Definition Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

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

***

Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments to the Asset Purchase Agreement have been omitted. The registrant hereby agrees to furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

Signature

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

FURMANITE CORPORATION

(Registrant)

/s/ ROBERT S. MUFF

Robert S. Muff

Chief Accounting Officer

(Principal Financial and Accounting Officer)

Date: August 2, 2013

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