TEAM, Inc. (NYSE: TISI) — FY 2016 Form 10-K
Business and period: Team provides industrial inspection, integrity engineering, heat treating, and mechanical repair services to refining, petrochemical, power, pipeline, and other heavy-industry customers. The filing covers the year ended December 31, 2016. Team changed its fiscal year-end from May 31; the 2015 comparison below is unaudited full-year data, while the previously reported transition period covered seven months.
Financial performance
| Metric | FY 2016 | FY 2015 comparison |
|---|---|---|
| Revenue | $1,196.7 million | $926.4 million |
| Gross profit / margin | $328.6 million / 27.5% | $270.9 million / 29.3% |
| Operating income (loss) / margin | $(3.1) million / (0.3)% | $47.3 million / 5.1% |
| Net income (loss) attributable to Team shareholders | $(12.7) million; $(0.45) per diluted share | $25.2 million; $1.18 per diluted share |
| Operating cash flow | $79.6 million | $17.3 million for the seven-month transition period |
Fourth quarter: Revenue was $319.8 million versus $255.0 million in Q4 2015. Operating loss was $5.7 million versus operating income of $10.7 million; net loss attributable to Team shareholders was $9.4 million versus income of $5.5 million. Q4 diluted loss per share was $0.32 versus diluted earnings per share of $0.26.
Segments: FY revenue was $589.5 million for TeamQualspec (+7.3%), $539.6 million for TeamFurmanite (+78.3%, substantially reflecting the acquisition), and $67.6 million for Quest Integrity (−9.2%). Segment operating income was $43.4 million, $27.3 million, and $4.8 million, respectively; corporate and shared support costs were $78.5 million.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $46.2 million at year-end; working capital was $253.6 million. Management stated that $14.0 million of cash held in foreign subsidiaries was considered indefinitely reinvested, limiting practical access.
- Credit-facility debt was $366.9 million, including $20.0 million current maturities. The facility matures in July 2020 and carries variable-rate interest; the year-end Eurodollar margin was 2.25% over LIBOR. Available borrowing capacity was approximately $29 million.
- Year-end total leverage ratio was 4.19x against a 4.50x maximum. The permitted maximum tightens to 4.25x in March and June 2017, then 3.75x in September and declines quarterly thereafter. The company reported covenant compliance at year-end.
- Operating cash flow of $79.6 million included a $31.2 million working-capital decrease. Investing activities used $70.8 million, including $45.8 million of capital expenditures and $48.4 million for acquisitions, partly offset by $13.3 million net proceeds from the sale of a business. Financing activities used $6.0 million.
Material changes and notable items
- Revenue increased 29.2% year over year, primarily due to the February 2016 Furmanite merger and the 2015 Qualspec acquisition. On a pro forma basis assuming both acquisitions from the start of 2015, revenue declined 8.9%.
- Management attributed weaker underlying performance to market softness, customer project deferrals and scope reductions, lower maintenance spending, and a shift away from higher-margin specialty work. TeamQualspec heat-treating sales volume was approximately 29% lower. Wildfires near Fort McMurray and Louisiana flooding also affected activity.
- FY 2016 operating results included $34.6 million of non-routine costs, including acquisition and fiscal-year-change costs, ERP implementation, exit and severance costs, intellectual-property legal fees, and other items. Excluding non-routine items, operating income still declined by $30.0 million, according to management.
- Furmanite was acquired for approximately $282.3 million, including settlement of approximately $70.8 million of its debt; the consideration included Team shares. Team also acquired European businesses QIS/TiaT and Turbinate for approximately $9 million and $8 million, respectively.
- Team sold an acquired pipeline-inspection business in December 2016 for $13.3 million net cash proceeds and a $1.5 million note. It reported a $0.1 million after-tax loss from discontinued operations.
- Goodwill was $355.8 million and intangible assets were $176.1 million at year-end. The annual impairment test found no impairment. The company had $21.2 million of defined-benefit pension liabilities, assumed with Furmanite.
Outlook, risks, and contingencies
Management gave no specific quantified financial guidance. It expressed optimism that end markets could improve during 2017, but noted that apparent fall 2016 improvement did not persist and demand weakened again late in the year. The filing emphasizes exposure to refining and petrochemical demand, competitive pricing and margins, project timing and seasonality, skilled-labor availability, safety and environmental liabilities, foreign exchange, and acquisition integration.
Debt and covenant compliance are significant risks given limited borrowing availability, floating interest rates, and the scheduled tightening of leverage limits. Management said it was pursuing initiatives to reduce debt and improve operating cash flow, without assurance of success. The new ERP system was expected to be substantially installed by the end of 2017; $44.9 million had been capitalized through year-end, and implementation costs affected 2016 results.
Team disclosed 92 pending lawsuits related to the 2007 Con Edison steam-main rupture; it could not estimate its potential liability and had not accrued amounts above the $250,000 deductible. It also reported patent-infringement litigation brought by Quest Integrity. The company stated it did not expect these matters to materially affect its financial statements. Management and the auditor reported effective internal controls, but both excluded Furmanite controls from their assessment.
Investor verification priorities
- Reconcile reported revenue growth with the 8.9% pro forma decline and assess underlying demand and margins after acquisition effects.
- Review cash conversion, working-capital movements, capital spending, and the sustainability of operating cash flow.
- Track leverage against the tightening covenant limits, liquidity headroom, variable-rate exposure, and any further ATM share issuance.
- Assess integration and restructuring progress, including remaining ERP costs and the planned Western Europe closures.
- Monitor the Con Edison and patent cases, insurance coverage, and any changes to recorded contingencies.
- Consider the period-comparability limits created by the fiscal-year change and acquisition timing; the filing’s 2015 full-year comparison is unaudited.