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

Business Overview

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

The Company provides specialized technical services, including on-line services, which include leak sealing, hot tapping, line stopping, line isolation, composite repair and valve testing. In addition, the Company provides off-line services, which include on-site machining, heat treatment, bolting and valve repair, and other services including smart shim services, concrete repair, engineering services, and valve and other products and manufacturing. These products and services are provided primarily to electric power generating plants, petroleum refineries, 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, 2012, consolidated revenues increased by $2.9 million and $1.6 million, respectively, compared to the three and six months ended June 30, 2011. Contribution margins for the six months ended June 30, 2012 were $2.2 million lower than the first six months of 2011, however margins for the three months ended June 30, 2012 were improved by $1.0 million compared to the same period in 2011. Operating income in 2012 has been negatively impacted due to several factors, including the execution of the Company's previously announced cost reduction initiatives, the relocation of its corporate headquarters and the implementation of its strategic organizational initiative aligning its service lines, service delivery centers and operations functions globally to maximize its ability to achieve its sustained growth objectives.

The Company has taken and continues to take specific actions in order to improve the operational and administrative efficiency of its EMEA operations. The Company committed to a cost reduction initiative in the second quarter of 2010, primarily related to the restructuring of certain functions within the Company's EMEA operations. In the second quarter of 2012, the Company committed to an additional cost reduction initiative related to further restructuring of its European operations within EMEA. The additional restructuring initiative is expected to include workforce reductions primarily within the Company's selling, general and administrative functions. The Company has taken these specific actions in order to reduce administrative and overhead expenses and streamline its European operations' structure for improved operational efficiencies in the wake of the challenging economic conditions in the region. The Company estimates the total costs to be incurred in connection with this additional initiative to be approximately $2.5 million, principally all of which relates to one-time termination benefits. As of June 30, 2012, the costs incurred since the inception of the additional cost reduction initiative totaled approximately $0.7 million. The Company expects to complete these cost reduction actions by the end of 2012, recognizing substantially all of the remaining $1.8 million of charges related to the initiative during the third quarter of 2012. For the cost reduction initiative commenced in 2010, total costs expected to be incurred are $4.0 million, of which $3.8 million have been incurred as of June 30, 2012, with the remaining $0.2 million related primarily to lease termination costs.

As a result of these cost reduction initiatives and corporate headquarter relocation costs, total restructuring and relocation costs negatively impacted operating income by $1.4 million and $0.2 million and net income by $1.0 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, total restructuring and relocation costs negatively impacted operating income by $2.2 million and $0.2 million and net income by $1.5 million and $0.2 million, respectively.

The Company's net income for the three and six months ended June 30, 2012 decreased by $3.3 million and $8.2 million, respectively, compared to the three and six months ended June 30, 2011. The Company's diluted earnings per share for the three and six months ended June 30, 2012 were $0.05 and $0.03, respectively, compared to $0.14 and $0.25 for the three and six months ended June 30, 2011, respectively.

Results of Operations



                                                For the Three Months             For the Six Months
                                                   Ended June 30,                  Ended June 30,
                                                2012             2011           2012            2011

Revenues                                     $    85,928       $ 83,009       $ 157,710       $ 156,063
Costs and expenses:
Operating costs (exclusive of
depreciation and amortization)                    58,326         56,425         110,678         106,868
Depreciation and amortization expense              1,964          2,198           3,989           4,073
Selling, general and administrative
expense                                           20,835         17,779          38,991          34,690

Total costs and expenses                          81,125         76,402         153,658         145,631

Operating income                                   4,803          6,607           4,052          10,432
Interest income and other income
(expense), net                                       (72 )          120            (200 )           242
Interest expense                                    (197 )         (255 )          (598 )          (495 )

Income before income taxes                         4,534          6,472           3,254          10,179
Income tax expense                                (2,690 )       (1,326 )        (2,240 )        (1,007 )

Net income                                   $     1,844       $  5,146       $   1,014       $   9,172


Earnings per common share:
Basic                                        $      0.05       $   0.14       $    0.03       $    0.25
Diluted                                      $      0.05       $   0.14       $    0.03       $    0.25

Additional Revenue Information:



                                For the Three Months          For the Six Months
                                   Ended June 30,               Ended June 30,
                                 2012            2011         2012          2011

          On-line services    $    29,949      $ 31,625     $  60,094     $  59,549
          Off-line services        42,652        37,678        71,370        70,178
          Other services           13,327        13,706        26,246        26,336

          Total revenues      $    85,928      $ 83,009     $ 157,710     $ 156,063

Business Segment and Geographical Information



                                               For the Three Months             For the Six Months
                                                  Ended June 30,                  Ended June 30,
                                               2012             2011           2012            2011
                                                                  (in thousands)

Revenues:
Americas                                    $    46,944       $ 40,943       $  87,642       $  81,170
EMEA                                             27,485         32,266          50,512          56,939
Asia-Pacific                                     11,499          9,800          19,556          17,954

Total revenues                                   85,928         83,009         157,710         156,063

Costs and expenses:
Operating costs (exclusive of
depreciation and amortization)
Americas                                         32,136         27,522          60,776          54,626
EMEA                                             19,466         22,250          37,666          39,967
Asia-Pacific                                      6,724          6,653          12,236          12,275

Total operating costs (exclusive of
depreciation and amortization)                   58,326         56,425         110,678         106,868
Operating costs as a percentage of
revenue                                            67.9 %         68.0 %          70.2 %          68.5 %

Depreciation and amortization expense
Americas, including corporate                     1,119          1,159           2,258           2,188
EMEA                                                440            507             893           1,011
Asia-Pacific                                        405            532             838             874

Total depreciation and amortization
expense                                           1,964          2,198           3,989           4,073
Depreciation and amortization expense as
a percentage of revenue                             2.3 %          2.6 %           2.5 %           2.6 %

Selling, general and administrative
expense
Americas, including corporate1                   12,937          9,941          23,647          19,455
EMEA                                              6,118          6,210          11,678          11,900
Asia-Pacific                                      1,780          1,628           3,666           3,335

Total selling general and administrative
expense                                          20,835         17,779          38,991          34,690
Selling, general and administrative
expense as a percentage of revenue                 24.2 %         21.4 %          24.7 %          22.2 %

Total costs and expenses                    $    81,125       $ 76,402       $ 153,658       $ 145,631

1 Includes corporate overhead costs of $5.5 million and $4.0 million for the three months ended June 30, 2012 and 2011, respectively, and $9.6 and $7.2 million for the six months ended June 30, 2012 and 2011, 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, 2012, consolidated revenues increased by $1.6 million, or 1.1%, to $157.7 million, compared to $156.1 million for the six months ended June 30, 2011. Changes related to foreign currency exchange rates unfavorably impacted revenues by $2.7 million, of which $2.3 million and $0.4 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $4.3 million, or 2.8%, for the six months ended June 30, 2012 compared to the same period in 2011. This $4.3 million increase in revenues consisted of $6.5 million and $1.9 million increases in the Americas and Asia-Pacific, respectively, but were offset by a $4.1 million decrease in EMEA. The increase in revenues in the Americas was primarily related to increases in off-line services, which included volume increases in on-site machining and valve repair services of approximately 12% when compared to revenues in the same period in 2011. In addition, revenues increased within other services by approximately 18%, when compared to the same period in 2011. The increase in revenues in Asia-Pacific was attributable to increases in both on-line and off-line services. The increases within on-line services primarily included volume increases in composite repair and leak sealing services of approximately 22% when compared to revenues in the same period in 2011. The increase within Asia-Pacific's off-line services primarily included volume increases in

bolting services in Australia of approximately 27% when compared to bolting revenues in the same period in 2011. The decrease in revenues in EMEA was primarily attributable to decreases in off-line services, which included volume decreases in valve repair, on-site machining and bolting services of approximately 18% when compared to revenues in the same period in 2011, as the Company's central European locations within the EMEA region have continued to be negatively impacted by the economic crisis, resulting in unexpectedly lower revenue levels in most service lines.

For the three months ended June 30, 2012, consolidated revenues increased by $2.9 million, or 3.5%, to $85.9 million, compared to $83.0 million for the three months ended June 30, 2011. Changes related to foreign currency exchange rates unfavorably impacted revenues by $2.4 million, of which $1.7 million and $0.7 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $5.3 million, or 6.4%, for the three months ended June 30, 2012 compared to the same period in 2011. This $5.3 million increase in revenues consisted of increases of $6.0 million and $2.4 million in the Americas and Asia-Pacific, respectively, which were partially offset by a decrease of $3.1 million in EMEA. The increase in revenues in the Americas was due to increases in off-line services, which included volume increases primarily related to increases in valve repair, on-site machining and bolting services of approximately 33% when compared to revenues in the same period in 2011. The increase in revenues in Asia-Pacific was primarily attributable to increases in off-line services, which primarily related to volume increases in bolting services in Australia of approximately 57%, when compared to revenues in the same period in 2011, but also included volume increases in on-site machining services. The decrease in revenues in EMEA was primarily related to decreases in off-line services and primarily related to volume decreases in valve repair and bolting services of approximately 20% when compared to revenues in the same period in 2011.

Operating Costs (exclusive of depreciation and amortization)

For the six months ended June 30, 2012, operating costs, including $0.1 million of restructuring costs, increased $3.8 million, or 3.6%, to $110.7 million, compared to $106.9 million for the six months ended June 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $2.0 million, of which $1.8 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 $5.8 million, or 5.4%, for the six months ended June 30, 2012, compared to the same period in 2011. This change consisted of $6.2 million and $0.1 million of increases in the Americas and Asia-Pacific, respectively, partially offset by a decrease of $0.5 million in EMEA. The increase in operating costs in the Americas was primarily related to higher material and labor costs of approximately 10% when compared to the same period in 2011, which were attributable to the increase in revenues. The operating costs in Asia-Pacific were consistent with the prior period as increases in labor costs, associated with the higher revenues in Australia, were substantially offset by lower material costs. The decrease in operating costs in EMEA was associated with moderate reductions in labor and material costs when compared to the same period in 2011. These cost reductions, however, were disproportionate to the decrease in revenues due to lower margin realization in EMEA in the first quarter of 2012.

For the three months ended June 30, 2012, operating costs, including $0.1 million of restructuring costs, increased $1.9 million, or 3.4%, to $58.3 million, compared to $56.4 million for the three months ended June 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $1.7 million, of which $1.3 million and $0.4 million were related to favorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, operating costs increased by $3.6 million, or 6.4%, for the three months ended June 30, 2012, compared to the same period in 2011. This change consisted of $4.7 million and $0.4 million increases in the Americas and Asia-Pacific, respectively, which were partially offset by a $1.5 million decrease in EMEA. The increase in operating costs in the Americas was primarily attributable to an increase in labor and material costs of approximately 14% and was associated with the increase in revenues when compared to the same period in 2011. The increase in Asia-Pacific was due to increases in labor costs and travel expenses of approximately 21% associated with increases in revenues but was partially offset by lower material costs of approximately 8% when compared to the same period in 2011. The operating costs in EMEA decrease was primarily related to a decrease in labor and material costs of approximately 9% when compared to the same period in 2011.

Operating costs as a percentage of revenue increased to 70.2% from 68.5% for the six months ended June 30, 2012 and 2011, respectively, however were consistent, at 67.9% and 68.0% for the three months ended June 30, 2012 and 2011, respectively. The percentage of operating costs to revenues for the six months ended June 30, 2012 was higher compared to the same period in 2011 due to lower first quarter 2012 margins as a result of lower utilization of labor, as well as significantly lower margin realization in EMEA, principally in the Company's central European locations, due to decreased revenues.

Depreciation and Amortization

For the three and six months ended June 30, 2012, depreciation and amortization expense decreased $0.2 million and $0.1 million, respectively, when compared to the same periods in 2011. Changes related to foreign currency exchange rates favorably impacted depreciation and amortization expense by $0.1 million for each of the three and six months ended June 30, 2012. Excluding the foreign currency exchange rate impact, depreciation and amortization expense for the three and six months ended June 30, 2012 was consistent with the same periods in 2011.

Depreciation and amortization expense as a percentage of revenue was 2.3% and 2.6% for the three months ended June 30, 2012 and 2011, respectively, and 2.5% and 2.6% for the six months ended June 30, 2012 and 2011, respectively.

Selling, General and Administrative

For the six months ended June 30, 2012, selling, general and administrative expenses, including $2.1 million of restructuring and relocation costs, increased $4.3 million, or 12.4%, to $39.0 million compared to $34.7 million for the six months ended June 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $0.7 million, of which $0.6 million and $0.1 million were related to favorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, selling, general and administrative expenses increased $5.0 million, or 14.4%, for the six months ended June 30, 2012, compared to the same period in 2011. This $5.0 million increase in selling, general and administrative costs consisted of $4.2 million, $0.4 million and $0.4 million in increases in the Americas, 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 7% when compared to the same period in 2011, associated primarily with the Company's corporate headquarters relocation and strategic global organizational alignment initiative. The six months ended June 30, 2012 included $1.5 million of corporate relocation costs incurred in connection with the relocation of the corporate headquarters to Houston, Texas, which occurred during the first half of 2012. In EMEA, increases in selling, general and administrative costs were primarily related to higher severance related restructuring costs which totaled $0.6 million in the six months ended June 30, 2012 compared to $0.1 million in the six months ended June 30, 2011. In Asia-Pacific, increases in selling, general and administrative costs were primarily a result of the increased activity levels and general provisions within the region.

For the three months ended June 30, 2012, selling, general and administrative expenses, including $1.3 million of restructuring and relocation costs, increased $3.0 million, or 17.2%, to $20.8 million compared to $17.8 million for the three months ended June 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $0.6 million, of which $0.5 million and $0.1 million were related to favorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, selling, general and administrative expenses increased $3.6 million, or 20.2%, for the three months ended June 30, 2012, compared to the same period in 2011. This $3.6 million increase in selling, general and administrative expenses consisted of $3.0 million, $0.4 million and $0.2 million in increases in the Americas, 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 13% when compared to the same period in 2011, associated primarily with the Company's corporate headquarter relocation and strategic global organization alignment initiative. The three months ended June 30, 2012 included $0.7 million of additional corporate relocation costs incurred in connection with the relocation of the corporate headquarters to Houston, Texas. Increases in selling, general and administrative expenses in EMEA were primarily related to higher severance related restructuring costs which totaled $0.6 million in the three months ended June 30, 2012 compared to $0.1 million in the three months ended June 30, 2011. In Asia-Pacific, increases in selling, general and administrative expenses were primarily related to the increased activity levels in Australia.

As a result of the above factors, selling, general and administrative costs, including restructuring and relocation costs, as a percentage of revenues increased to 24.2% and 24.7% for the three and six months ended June 30, 2012, respectively, compared to 21.4% and 22.2% for the three and six months ended June 30, 2011, respectively. Excluding restructuring and relocation costs, selling, general and administrative costs as a percentage of revenue for the three and six months ended June 30, 2012 would have been 22.7% and 23.4%, respectively.

Other Income

Interest Income and Other Income (Expense), Net

For the three and six months ended June 30, 2012, interest income and other income (expense) decreased $0.2 million and $0.4 million, respectively, when compared to the same periods in 2011. 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, 2012, consolidated interest expense increased $0.1 million when compared to the same period in 2011. This increase was primarily related to the acceleration of $0.2 million of debt issuance costs which were expensed in the first quarter of 2012 due to the termination of the Previous Credit Agreement but were partially offset by lower average debt outstanding on notes payable. For the three months ended June 30, 2012, consolidated interest expense decreased $0.1 million when compared to the same period in 2011 due to a reduction in average debt outstanding on notes payable.

Income Taxes

Income tax expense reflects the Company's estimated annual effective income tax rate, adjusted in interim periods for specific discrete items as required, considering the statutory rates in the countries in which the Company operates and the effects of valuation allowance changes for certain foreign entities. At the end of 2011, it was determined that the net deferred tax assets in the United States were expected to be realized and accordingly the valuation allowance on federal and state deferred tax assets was reversed. For the three and six months ended June 30, 2011, substantially all domestic federal income taxes, as well as certain state and foreign income taxes, were fully offset by a corresponding change in the valuation allowance. Income tax expense recorded for the three and six months ended June 30, 2011 consisted of income tax expense in foreign and state jurisdictions in which the Company operates, with the six months ended June 30, 2011 partially offset by a valuation allowance change resulting in a deferred tax benefit of $1.2 million related to the SLM acquisition.

For the six months ended June 30, 2012 and 2011, the Company recorded income tax expense of $2.2 million and $1.0 million, respectively. For the three months ended June 30, 2012 and 2011, the Company recorded income tax expense of $2.7 million and $1.3 million, respectively. Current year income tax expense as a percent of income before income taxes was abnormally inflated as a result of a significantly high percentage of pre-tax losses in countries with valuation allowances compounded by the impact of the restructuring initiative, compared to pre-tax income in other countries. The result is an effective tax rate of approximately 59.3% and 68.8% for the three and six months ended June 30, 2012, respectively. The Company estimates its effective income tax rate for the second half of 2012 and for the entire year to approximate 40% and 45%, respectively, with expectations for a normal effective rate in the low 30% range beginning in 2013 considering the mix of statutory tax rates in which the Company operates.

Income tax expense as a percentage of income before income taxes was approximately 9.9% for the six months ended June 30, 2011. For the three months ended June 30, 2011 income tax expense as a percentage of income before income taxes was approximately 20.5%. Excluding the $1.2 million acquisition related deferred tax benefit noted above, the effective income tax rate for the six months ended June 30, 2011 was 21.9%. Additional differences in the 2011 income tax rates from the U.S. statutory rate is due to the change in the effective rate assessed on U.S. deferred tax assets with the reversal of the valuation allowance on U.S. deferred tax assets at the end of 2011, as well as changes in the mix of income before income taxes between countries whose income taxes are offset by full valuation allowances and those that are not, and differing statutory tax rates in the countries in which the Company incurs tax liabilities.

Liquidity and Capital Resources

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

Net cash provided by operating activities for the six months ended June 30, 2012 . . .