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October 6, 2014

Furmanite Corporation (NYSE: FRM) $7.09

Revenue growth will accelerate following the completion of a restructuring that has transformed the
company. Recent acquisitions also provide FRM with significant competitive advantages combined with
exposures to markets that are expected to grow rapidly as they benefit from the ongoing US shale oil
revolution.

Investment Thesis:
FRM trades at a discount to its competitor, Team Inc (TISI) but its growth will continue to accelerate and
it will improve its competitive profile relative to TISI as it has now completed a multi-year restructuring
that commenced in 2010. This should provide a catalyst for FRM to trade at a premium to its
competitors over the next several quarters as it gains market share from cross-selling opportunities
from its non-destructive testing (NDT) and inspections business that came with the ENGlobal acquisition.
FRM will grow revenues ~20% annually via organic growth and from tack-on acquisitions in a highly
fragmented market.

1) Newly completed global organizational concept following the completion of “The Orange
Way” restructuring will facilitate growth and higher margins: Historically FRM has
functioned as a group of smaller entities which impaired its ability to sell and provide
multiple service lines across a global service organization. The success of the restructuring is
evident as revenue growth has accelerated since the restructuring commenced in 2010,
after declining in 2009, and further accelerated since the completion of the restructuring in
2013. FY2014 revenue growth year-over year is expected to be better than 30%.

2) Acquisition of ENGlobal Gulf Coast operations will facilitate revenue growth as it expands
the services FRM offers and provides a significant opportunity to cross-sell the Technical
Services segment offerings to new NDT and Inspection clients.: In September 2013 with the
acquisition of ENGlobal Gulf Coast operations approximately 900 full-time professionals
transitioned to the Engineering & Project Solutions (E&PS) segment, a newly created
operating segment of FRM. The E&PS segment provides a new range of services including
project planning, project control, non-destructive testing and inspection, construction
management, mechanical integrity, field support, quality assurance and plant asset
management services to refining and petrochemical operators. The E&PS segment has the
ability to direct some business to FRM’s legacy Technical Services segment and over time
will accelerate the organic growth opportunities.

3) Highly fragmented market facilitates growth both organically and via acquisitions. FRM
market share in the markets it operates is generally no more than 10-15% and provides a
significant opportunity to grow via acquisitions. FRM has completed 4 acquisitions since
2010, two of which were done in 2013. The acquisitions have fueled year-over-year top line
growth of ~33% in 2013 vs 2012 with ~10% coming from organic growth and the rest from
acquisitions. The company expects to continue growing organically at ~10-12% and will add
another ~10% from acquisitions.



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Company Description and Background:

Summary:
Furmanite Corporation is a worldwide technical services firm with headquarters in Houston, Texas and it
is one of the world’s largest specialty technical services companies, and delivers a broad portfolio of
engineering solutions that keep facilities operating, minimizing downtime and maximizing profitability.

FRM’s diverse global operations with ~3,000 employees in ~85 locations worldwide serves a broad array
of industrial sectors, including offshore drilling operations, pipelines, refineries and power generation
facilities, chemical and petrochemical plants, steel mills, automotive manufacturers, pulp and paper
mills, food and beverage processing plants, semi-conductor manufacturers and pharmaceutical
manufacturers.

Operating Segments:
FRM conducts its business through various wholly owned subsidiaries and affiliates, both domestic and
international. The company operates in two segments, the Technical Services operating segment which
is the legacy FRM business and the newly created Engineering & Project Solutions segment. With the
completion of the acquisition of ENGlobal Gulf Coast operations in late 2013 FRM now reports its
revenues for financial reporting purposes, in two operating segments that are mainly based on its
service and product offerings.

The Technical Services segment provides specialized technical services, which include on-line, off-line
and other services. Within technical services, on-line services include leak sealing, hot tapping, line
stopping, line isolation, composite repair, valve testing and certain non-destructive testing and
inspection services, while off-line services include on-site machining, heat treatment, bolting, valve
repair and other non-destructive testing and inspection services. Other services include smart shim
services, concrete repair, engineering services, valves and other products and manufacturing. These
services and products are provided primarily to electric power generating plants, the 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.

The Engineering & Project Solutions segment, which includes the company’s Furmanite Technical
Solutions (“FTS”) division, provides project planning, professional engineering, downstream non-
destructive testing and inspection, construction management, mechanical integrity, field support,
quality assurance, and plant asset management services, as well as certain other inspection and project
management services. These services are provided to refining and petrochemical operators as well as
maintenance, and engineering and construction contractors serving the downstream and midstream oil
and gas markets, substantially all of which are in the Americas.

History & Restructuring:
FRM’s operations were founded in Virginia Beach, Virginia in the 1920s as a manufacturer of leak sealing
kits. The company has grown via numerous acquisitions since its formation and significantly expanded
its service offerings both through geographic expansion and the addition of new techniques, processes
and services to become one of the largest industrial services companies performing leak sealing and on-
site machining in the world. In addition, FRM entered the non-destructive testing and inspection market,
introducing certain services based on customer demand, primarily within the Americas via an acquisition
of ENGlobal Gulf Coast operations in 2013. As a result of the acquisition, the Company has significantly
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expanded its broad service offerings, greatly enhancing its engineering, design, and construction
management service capabilities. As such, the FRM will become a significantly more valuable resource to
its customers, providing increasingly comprehensive solutions to satisfy a wider range of its customers’
needs.


In March 2010 current CEO Charlie Cox assumed the CEO role and embarked upon a restructuring of the
company that was focused on cost reduction and on integrating the 75 locations to function efficiently
across the various service lines. The result when completed in 2012 was a unified company with a global
footprint that is now capable of competing effectively. Today with the completion of the restructuring
complete the company is focused on leveraging its global footprint to drive growth both across its
service lines and geographically.


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Multi-Year Growth driven by exposure to North American Oil & Gas Expansion Cycle:

Oil refineries and petrochemical plants account for 65% of FRM’s revenues. These two industries are
expected to benefit from the US shale revolution and offer significant tailwinds to FRM for the next
several years.







FRM provides off-line services (~45-49% of revenues) including on-site machining, bolting, valve repair,
heat treating, ultrasonic, radiography, phased array, tube testing and repair on such systems and
equipment. These services tend to complement leak sealing and other on-line services since these off-
line services are usually performed while a plant or piping system is not operating. FRM also provides
on-line services (~31-36% of revenues) including leak sealing in valves, pipes and other components of
piping systems and related equipment typically used in flow-process industries. Other on-line services
provided include hot tapping, line stopping, line isolation, composite repair, valve testing, and visual
inspection. In addition, FRM provides other services including concrete repair, engineering services,
valve and other products and manufacturing. In performing these services, technicians generally work at
the customer’s location, frequently responding on an emergency basis.

FRM’s on-line, leak sealing services are performed on a variety of flow-process industry machinery,
often in difficult situations. Many of the techniques and materials are proprietary and some are
patented. FRM believes these techniques and materials provide it with a competitive advantage over
other organizations that provide similar services. The Company holds over 120 trademarks and patents
for its techniques, products, materials and equipment and continues to develop new and update
existing patents, as it considers these efforts to be essential to its operations. The patents, which are
registered in jurisdictions around the world, expire at various dates through December 2023. The skilled
technicians work with equipment in a manner designed to enhance safety and efficiency in temperature
environments ranging from cryogenic to 2,400 degrees Fahrenheit and pressure environments ranging
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from vacuum to 5,000 pounds per square inch. In many circumstances, employees are called upon to
custom-design tools, equipment or other materials to achieve the necessary repairs. These efforts are
supported by an internal quality control group as well as an engineering group and manufacturing group
that work with the on-site technicians in crafting these materials, tools and equipment.

Customers and Markets:

FRM’s customer base includes petroleum refineries, chemical plants, mining operations, offshore energy
production platforms, subsea piping systems, steel mills, nuclear and conventional power stations, pulp
and paper mills, food and beverage processing plants and other flow-process facilities in more than 50
countries. Most of the revenues are derived from fossil and nuclear fuel power generation companies,
petroleum refiners and chemical producers. Other significant markets include offshore oil producers,
mining operations and steel manufacturers. As the worldwide industrial infrastructure continues to age,
additional repair and maintenance expenditures are expected to be required for the specialized services
provided by FRM. Other factors that may influence the markets served by FRM include regulations
governing construction of industrial plants and safety and environmental compliance requirements and
the worldwide economic climate. No single customer accounted for more than 10% of the Company’s
consolidated revenues during any of the past three fiscal years.

With an over 85-year history, FRM’s customer relationships are long-term and worldwide. All customers
are served from the worldwide headquarters in Houston, Texas and the Company has a substantial
presence in EMEA and Asia-Pacific. FRM currently operates over 25 offices in the United States (“U.S.”).
The worldwide operations are further supported by offices currently located in countries on six
continents in Aruba, Australia, Azerbaijan, Bahrain, Belgium, Canada, China, Denmark, France,
Germany, Malaysia, The Netherlands, New Zealand, Norway, Singapore, Sweden and the U.K. and by
licensee and agency arrangements which are based in Argentina, Brazil, Dominican Republic, Egypt,
Hungary, Italy, Japan, Mexico, Peru, Puerto Rico, Romania, South Africa, Thailand, Turkey and the United
Arab Emirates.

Revenues by major geographic region for 2013 were 68% for the Americas, 24% for EMEA and 8% for
Asia-Pacific.

FRM’s leak sealing on-line and other specialty field services are marketed primarily through direct sales
calls on customers by salesmen and technicians based at the various operating locations, which are
situated to facilitate timely customer response, 24 hours a day and seven days a week. Customers are
usually billed on a time and materials basis for services typically performed pursuant to either job
quotation sheets or purchase orders issued under written customer agreements.

Furmanite has select master service customer agreements, which can provide coverage for multiple
years, and selected services with defined rates from which orders are then released with defined scopes
of work. Other customer arrangements are generally short-term in duration and specify the range of,
and rates for, the services to be performed. Furmanite typically provides various limited warranties,
depending upon the services furnished, and has had no material warranty costs during any of the years
ended December 31, 2013, 2012 or 2011. Furmanite generally competes on the basis of service, product
performance, technical know-how, engineering solutions and price on a localized basis with smaller
companies and the in-house maintenance departments of its customers or potential customers.
Furmanite believes it currently has an advantage over in-house maintenance departments because of
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the ability of the Company’s multi-disciplined technicians to use proprietary and patented techniques to
perform quality repairs on a timely basis while customer equipment remains in service.



Valuation:

FRM has underperformed for two reasons, both of which are short-term idiosyncratic issues that will be
corrected over the next few quarters. In both March 2014 and May 2014 FRM reported Q4 13 and Q1
14 earnings that missed expectations as a result of a combination of bad weather and poor margins in its
recently acquired E&PS segment. The weather adversely impacted revenues as work was delayed due
to the harsh winter weather. FRM’s gross margins were negatively impacted as they had to maintain
and pay their personnel but were unable to fully utilize the personnel due to various projects being
delayed. This is a temporary issue and while it created a short-term challenge for FRM in the longer
term as access to skilled labor becomes an issue for competitors, FRM will be advantageously positioned
with resources that it can fully utilize. The operating leverage in this business in significant and can
benefit margins substantially over the long term. Additionally, with the increased headcount post the
ENGlobal acquisition and the temporary challenge of integrating the new segment, margins in that
segment have been dilutive to the overall company’s margin. This also is a short term issue that is
expected to be corrected by Q4 14, in fact in their last earnings conference call the company reiterated
that the E&PS segment will not be a money loser by year end. Sequentially, as the margins in the E&PS
segment improve they will prove to be less of a drag on overall company’s margin.

As a result of these temporary issues FRM currently trades at a discount to its peers Team Inc. (NYSE:
TISI) and Mistras Group, Inc. (NYSE: MG). FRM trades at a 2015 EV/EBITDA multiple of 6.5x versus 7.9x
and 7.3x for TISI and MG, respectively. Its 2015 P/E multiple is 13x versus 17.2x and 19.4x for TISI and
MG, respectively. While the discount may have been warranted in prior years it should not be the case
currently as FRM has completed its turnaround and now effectively competes against TISI and in fact
may be advantageously positioned given its global footprint and the cross selling opportunities
presented from its newly acquired E&PS segment.

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FRM Relative Valuation


FRM Capital structure


Investors who have an investment horizon longer than a month or a quarter will be handsomely
rewarded in the next 6-12 months as FRM shows it can meet or beat its revenue guidance now that the
weather issues are behind it and more importantly as the E&PS segment gets to break-even and is no
longer dilutive to gross margins and EBITDA. In Q2 2014 FRM lost $0.5 million in the segment and I
expect them to break even in Q3 2014 but even if they meet management’s targeted break even by Q4
2014 you can expect lots of tailwinds in 2015 and beyond.

FRM is a company that will benefit significantly from the ramp up in energy infrastructure spending on
energy and chemical facilities along the Gulf Coast and Canada over the next 5+ years and I can see
them almost doubling EPS by 2017 without any heroic assumptions. Longer term investors will do well
to buy this stock now when the mass seems to be avoiding small/mid cap companies amid the recent
sell-off.

There is also the potential for an activist to initiate a position in FRM and advocate for a sale of the
company. The current management team has been somewhat inept at setting and managing the
guidance they have provided to investors and analysts and has resulted in them missing their estimates
for several consecutive quarters. That combined with the plannned early retirement of the current CEO
Mr. Cox, who was integral in turning the company around over the last 5+ years provides an
extraordinary opportunity for a strategic acquirer to attempt an acquisition of the company. A strategic
acquisition should result in significant accretion to an acquirer.

Name Mkt Cap (MM) EV (MM) 2014 EV/EBITDA 2015 EV/EBITDA 2014 P/E 2015 P/E
Furmanite Corp (FRM) 268.36 294.98 7.3 5.5 24.5 15.6
Team Inc. (TISI) 775.29 820.04 8.6 7.2 27.2 18.7
Mistras Group Inc. (MG) 573.75 661.58 8.2 6.8 30.4 22.1
in million $
(except shares
price)
Share price 7.13 $
Shares outstanding 37.64
Equity market cap 268.36
Cash & equivalents 37.78
Debt 64.40
Enterprise value 294.98
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FRM 2015 Valuation
Current share Price 7.13 $
Low Base High
FRM FRM FRM
93.2% 115.5% 137.8%
Share Price 13.78 $ 15.37 $ 16.96 $
Total Shares 37.63 37.63 37.63
Market Cap 518.37 578.25 638.12
Less Cash & equivalents ($50.73) ($50.73) ($50.73)
Add: Debt 41.31 41.31 41.31
Enterprise Value 508.95 $ 568.83 $ 628.70 $
508.95 $ 568.83 $ 628.70 $
EV 508.95 $ 568.83 $ 628.70 $
EBITDA 59.88 $ 59.88 $ 59.88 $
EV/EBITDA 8.5 9.5 10.5
P/E 20.5 21.0 23.0
EPS $0.77 $0.77 $0.77
FCF/sh $0.52 $0.52 $0.52
FCF Yield 7.3% 7.3% 7.3%
in Millions