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FRM > SEC Filings for FRM > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for FURMANITE CORP

Form 10-Q for FURMANITE CORP


7-Nov-2012

Quarterly Report


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

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

Business Overview

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

The Company provides specialized technical services, including on-line services, which include leak sealing, hot tapping, line stopping, line isolation, composite repair and valve testing. In addition, the Company provides off-line services, which include on-site machining, heat treatment, bolting and valve repair, and other services including 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 nine months ended September 30, 2012, consolidated revenues decreased by $2.7 million and $1.1 million, respectively, compared to the three and nine months ended September 30, 2011. Operating results in 2012 have been negatively impacted due to several factors, including the effects of the Company's cost reduction initiatives, the relocation of its corporate headquarters as well as certain integration, weather and execution related matters. In addition, current year results were unfavorably affected by the transitional effects of the formation and implementation of the Company's strategic organizational initiative aligning its service lines, service delivery centers and operations functions globally to maximize its ability to achieve its sustained growth objectives. Consequently, results from operations for the three and nine months ended September 30, 2012 were $6.2 million and $12.6 million lower than the corresponding periods of 2011, respectively.

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 duration of which is uncertain. The Company now estimates the total costs to be incurred in connection with this additional initiative to be approximately $2.7 million, principally all of which relates to one-time termination benefits. As of September 30, 2012, the costs incurred since the inception of the additional cost reduction initiative totaled approximately $0.8 million.

The Company had anticipated a greater portion of the restructuring initiative to be completed by the end of the quarter ended September 30, 2012, however certain statutory and administrative regulations have delayed the timing of certain actions. The Company intends to complete the remaining reduction actions by the end of 2012 and, accordingly, expects to recognize most of the remaining estimated $1.9 million of charges related to this initiative during the fourth 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 September 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 for the three months ended September 30, 2012 negatively impacted operating loss and net loss by $0.2 million. These costs had minimal impact on the operating income and net income for the three months ended September 30, 2011. For the nine months ended September 30, 2012 and 2011, total restructuring and relocation costs negatively impacted operating income (loss) by $2.5 million and $0.3 million, respectively, and negatively impacted net income (loss) by $1.7 million and $0.2 million, respectively.


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The Company's net loss per share for the three and nine months ended September 30, 2012 was $(0.03) and $(0.01), respectively, compared to diluted earnings per share of $0.10 and $0.34 for the three and nine months ended September 30, 2011, respectively.

Results of Operations



                                                 For the Three Months           For the Nine Months
                                                  Ended September 30,           Ended September 30,
                                                  2012            2011          2012           2011
Revenues                                       $    75,579      $ 78,330      $ 233,289      $ 234,393
Costs and expenses:
Operating costs (exclusive of depreciation
and amortization)                                   56,253        53,807        166,931        160,675
Depreciation and amortization expense                2,329         2,207          6,318          6,280
Selling, general and administrative expense         17,725        16,794         56,716         51,484

Total costs and expenses                            76,307        72,808        229,965        218,439

Operating income (loss)                               (728 )       5,522          3,324         15,954
Interest income and other income (expense),
net                                                    (79 )        (341 )         (279 )          (99 )
Interest expense                                      (230 )        (263 )         (828 )         (758 )

Income (loss) before income taxes                   (1,037 )       4,918          2,217         15,097
Income tax expense                                    (243 )      (1,336 )       (2,483 )       (2,343 )

Net income (loss)                              $    (1,280 )    $  3,582      $    (266 )    $  12,754

Earnings (loss) per common share:
Basic                                          $     (0.03 )    $   0.10      $   (0.01 )    $    0.34
Diluted                                        $     (0.03 )    $   0.10      $   (0.01 )    $    0.34

Additional Revenue Information:



                                    For the Three
                                    Months Ended            For the Nine Months
                                    September 30,           Ended September 30,
                                  2012         2011          2012          2011
            On-line services    $ 30,525     $ 30,877     $   90,619     $  90,426
            Off-line services     32,082       33,083        103,452       103,261
            Other services        12,972       14,370         39,218        40,706

            Total revenues      $ 75,579     $ 78,330     $  233,289     $ 234,393


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Business Segment and Geographical Information



                                                  For the Three Months             For the Nine Months
                                                  Ended September 30,              Ended September 30,
                                                  2012             2011           2012            2011
                                                                     (in thousands)
Revenues:
Americas                                       $    39,623       $ 34,858       $ 127,265       $ 116,028
EMEA                                                26,881         31,627          77,393          88,566
Asia-Pacific                                         9,075         11,845          28,631          29,799

Total revenues                                      75,579         78,330         233,289         234,393

Costs and expenses:
Operating costs (exclusive of depreciation
and amortization)
Americas                                            29,919         25,135          90,695          79,761
EMEA                                                19,782         21,493          57,448          61,460
Asia-Pacific                                         6,552          7,179          18,788          19,454

Total operating costs (exclusive of
depreciation and amortization)                      56,253         53,807         166,931         160,675
Operating costs as a percentage of revenue            74.4 %         68.7 %          71.6 %          68.5 %

Depreciation and amortization expense
Americas, including corporate                        1,550          1,175           3,808           3,363
EMEA                                                   427            499           1,320           1,510
Asia-Pacific                                           352            533           1,190           1,407

Total depreciation and amortization expense          2,329          2,207           6,318           6,280
Depreciation and amortization expense as a
percentage of revenue                                  3.1 %          2.8 %           2.7 %           2.7 %

Selling, general and administrative expense
Americas, including corporate1                      11,022          9,631          34,669          29,086
EMEA                                                 4,827          5,677          16,505          17,577
Asia-Pacific                                         1,876          1,486           5,542           4,821

Total selling general and administrative
expense                                             17,725         16,794          56,716          51,484
Selling, general and administrative expense
as a percentage of revenue                            23.5 %         21.4 %          24.3 %          22.0 %

Total costs and expenses                       $    76,307       $ 72,808       $ 229,965       $ 218,439

1 Includes corporate overhead costs of $4.7 million and $14.3 million for the three and nine months ended September 30, 2012 (including $0.1 million and $1.6 million of relocation costs), respectively, and $3.2 million and $10.4 million for the three and nine months ended September 30, 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 nine months ended September 30, 2012, consolidated revenues decreased by $1.1 million, or 0.5%, to $233.3 million, compared to $234.4 million for the nine months ended September 30, 2011. Changes related to foreign currency exchange rates unfavorably impacted revenues by $4.0 million, of which $3.5 million and $0.5 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, revenues increased by $2.9 million, or 1.2%, for the nine months ended September 30, 2012 compared to the same period in 2011. This $2.9 million increase in revenues consisted of an $11.2 million increase in the Americas but were substantially offset by decreases of $7.6 million and $0.7 million in EMEA and Asia-Pacific, respectively. 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 15% when compared to 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 19% when compared to revenues in the same period in 2011, as the Company's central European locations within the EMEA region


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have continued to be negatively impacted by the economic crisis, resulting in unexpectedly lower revenue levels in most service lines. These decreases in revenues were partially offset by moderate volume increases in heat treatment services within off-line services as well as hot tapping services within on-line services. The decrease in revenues in Asia-Pacific was attributable to decreases in off-line and other services primarily in Singapore but was partially offset by increases in on-line services in Australia.

For the three months ended September 30, 2012, consolidated revenues decreased by $2.7 million, or 3.5%, to $75.6 million, compared to $78.3 million for the three months ended September 30, 2011. Changes related to foreign currency exchange rates unfavorably impacted revenues by $1.3 million, of which $1.2 million and $0.1 million were related to unfavorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, revenues decreased by $1.4 million, or 1.8%, for the three months ended September 30, 2012 compared to the same period in 2011. This $1.4 million decrease in revenues consisted of decreases of $3.5 million and $2.7 million in EMEA and Asia-Pacific, respectively, which were partially offset by increases of $4.8 million in the Americas. Revenues in the recently completed quarter were negatively impacted by weather related issues in the Americas as well as the deferral of certain work expected to be completed in the third quarter of 2012. The increase in revenues in the Americas was primarily due to increases in off-line services, which related to volume increases in heat treatment, valve repair and on-site machining services of approximately 31% when compared to revenues in the same period in 2011. The decrease in revenues in EMEA was primarily related to decreases in off-line services and primarily related to volume decreases in valve repair services of approximately 16% when compared to revenues in the same period in 2011. The decrease in revenues in Asia-Pacific was primarily attributable to decreases in off-line services, which related to volume decreases in bolting, on-site machining and valve repair services of approximately 40%, when compared to revenues in the same period in 2011.

Operating Costs (exclusive of depreciation and amortization)

For the nine months ended September 30, 2012, operating costs, including $0.2 million of restructuring costs, increased $6.2 million, or 3.9%, to $166.9 million, compared to $160.7 million for the nine months ended September 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $3.1 million, of which $2.8 million and $0.3 million were related to favorable impacts from EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, operating costs increased $9.3 million, or 5.8%, for the nine months ended September 30, 2012, compared to the same period in 2011. This change consisted of an $10.9 million increase in the Americas but was partially offset by decreases of $1.2 million and $0.4 million in EMEA and Asia-Pacific, respectively. The increase in operating costs in the Americas was primarily related to higher material and labor costs of approximately 13% when compared to the same period in 2011, which were primarily attributable to the increase in revenues, however, were disproportionate to the increase in revenues due to lower than expected margin realization on certain jobs. The decrease in operating costs in EMEA was associated with moderate reductions in labor costs of approximately 4% but were partially offset by higher material costs when compared to the same period in 2011. These cost reductions, however, were not consistent with the decrease in revenues due to low margin realization, particularly in the first half of 2012 due to the continued challenges within the segment's central European locations. The operating costs in Asia-Pacific decreased slightly compared to the prior period due to lower material costs but were partially offset by increases in labor costs, which were associated with the higher revenues in Australia.

For the three months ended September 30, 2012, operating costs increased $2.4 million, or 4.5%, to $56.2 million, compared to $53.8 million for the three months ended September 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $1.1 million, of which $1.0 million and $0.1 million were related to favorable impacts in EMEA and Asia-Pacific, respectively. Excluding the foreign currency exchange rate impact, operating costs increased by $3.5 million, or 6.5%, for the three months September 30, 2012, compared to the same period in 2011. This change consisted of a $4.7 million increase in the Americas which was partially offset by decreases of $0.7 million and $0.5 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 20% and was partially associated with the increase in revenues when compared to the same period in 2011 as well as the lower than anticipated margins on certain jobs and the transitional effects and integration efforts associated with a late second quarter acquisition. In EMEA, the operating costs decrease was primarily related to a decrease in labor costs of approximately 9% when compared to the same period in 2011. The decrease in operating costs in Asia-Pacific was related to decreases in labor costs and travel expenses of approximately 8%, associated with decreases in revenues, when compared to the same period in 2011.

Operating costs as a percentage of revenue increased to 71.6% from 68.5% for the nine months ended September 30, 2012 and 2011, respectively, and increased to 74.4% from 68.7% for the three months ended September 30, 2012 and 2011, respectively. The percentage of operating costs to revenues for the three and nine months ended September 30, 2012 was higher compared to the same period in 2011 due to lower margin realization as a result of the factors noted above.


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Depreciation and Amortization

For the three and nine months ended September 30, 2012, depreciation and amortization expense was consistent with the same periods in 2011. Changes related to foreign currency exchange rates were insignificant for the three and nine months ended September 30, 2012.

Depreciation and amortization expense as a percentage of revenue was 3.1% and 2.8% for the three months ended September 30, 2012 and 2011, respectively, and 2.7% for each of the nine months ended September 30, 2012 and 2011.

Selling, General and Administrative

For the nine months ended September 30, 2012, selling, general and administrative expenses, including $2.2 million of restructuring and relocation costs, increased $5.2 million, or 10.1%, to $56.7 million compared to $51.5 million for the nine months ended September 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $1.0 million, of which $0.9 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 $6.2 million, or 12.0%, for the nine months ended September 30, 2012, compared to the same period in 2011. This $6.2 million increase in selling, general and administrative costs consisted of $5.6 million and $0.8 million in increases in the Americas and Asia-Pacific, respectively, offset by a $0.2 million decrease in EMEA. Selling, general and administrative expense increases in the Americas were related to $1.6 million of corporate relocation costs incurred in connection with the relocation of the corporate headquarters to Houston, Texas, as well as an increase in personnel and related costs associated primarily with the Company's strategic global organizational alignment initiative, and a moderate increase in professional fees when compared to the same period in 2011. In EMEA, selling, general and administrative costs were consistent with costs in the prior period as the decreases in salary and related costs were substantially offset by higher severance related restructuring costs, which totaled $0.6 million for the nine months ended September 30, 2012 compared to $0.1 million for the nine months ended September 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 in the first half of 2012.

For the three months ended September 30, 2012, selling, general and administrative expenses, including $0.1 million of restructuring and relocation costs, increased $0.9 million, or 5.5%, to $17.7 million compared to $16.8 million for the three months ended September 30, 2011. Changes related to foreign currency exchange rates favorably impacted costs by $0.3 million, all of which related to favorable impacts in EMEA. Excluding the foreign currency exchange rate impact, selling, general and administrative expenses increased $1.2 million, or 7.1%, for the three months ended September 30, 2012, compared to the same period in 2011. This $1.2 million increase in selling, general and administrative expenses consisted of $1.4 million and $0.4 million in increases in the Americas and Asia-Pacific, respectively, but was partially offset by decreases of $0.6 million in EMEA. The increase in selling, general and administrative expenses in the Americas was related to an increase in personnel and related costs of approximately 5%, associated primarily with the Company's corporate headquarter relocation and strategic global organization alignment initiative, and higher travel and professional fees of approximately 5%, when compared to the same period in 2011. The three months ended September 30, 2012 included $0.1 million of additional corporate relocation costs incurred in connection with the relocation of the corporate headquarters to Houston, Texas. Decreases in selling, general and administrative expenses in EMEA were a result of decreases in activity levels within the region as well as lower salary and related costs. There were minimal restructuring costs during the three months ended September 30, 2012 and 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 23.5% and 24.3% for the three and nine months ended September 30, 2012, respectively, compared to 21.4% and 22.0% for the three and nine months ended September 30, 2011, respectively.

Other Income

Interest Income and Other Income (Expense), Net

For the nine months ended September 30, 2012, net expenses of interest income and other income (expense) increased to $0.3 million from $0.1 million in the same period in the prior year. For the three months ended September 30, 2012, net expenses of interest income and other income (expense) decreased to $0.1 million from $0.3 million when compared to the same periods in 2011. Changes within interest income and other income (expense) primarily related to fluctuations within foreign currency exchange gains and losses.


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Interest Expense

For the nine months ended September 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 September 30, 2012, consolidated interest expense was consistent with the same period in 2011.

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 nine months ended September 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 nine months ended September 30, 2011 consisted of income tax expense in foreign and certain state jurisdictions in which the Company operates, with the nine months ended September 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 nine months ended September 30, 2012 and 2011, the Company recorded income tax expense of $2.5 million and $2.3 million, respectively. For the three months ended September 30, 2012 and 2011, the Company recorded income tax expense of $0.2 million and $1.3 million, respectively. Current year income tax expense as a percentage of income (loss) 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, as compared to pre-tax income in other countries. As a result, income tax expense of $0.2 million was incurred despite a pre-tax loss for the three months ended September 30, 2012, while income tax expense as a percentage of income (loss) before income taxes was approximately 112.0% for the nine months ended September 30, 2012. The 2012 estimated annual effective income tax rate for countries without valuation allowance on their deferred tax assets is approximately 36.4%. This effective tax rate differs slightly from the U.S. statutory rate as domestic state taxes and other nondeductible expense are substantially offset by lower statutory rates in other countries in which the Company operates. The Company expects its effective income tax rate to be somewhat reduced for the fourth quarter and the entire year of 2012 but to remain significantly higher than what would be considered a normalized effective tax rate in the low 30 percent range 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 27.2% and 15.5% for the three and nine months ended September 30, 2011, respectively. Excluding the $1.2 million acquisition related deferred tax . . .

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